As of today, the Coronavirus Aid, Relief and Economic Security (CARES) Act has been passed by the Senate. As of this writing, the CARES Act still requires approval from the House and the President’s signature before becoming law. Included in this Act is the authorization of $349 billion of federally guaranteed loans to qualifying small and medium-sized businesses through the expansion of the SBA 7(a) with the “Paycheck Protection Program.” The Senate debated the legislation before it was approved late last night and the House is expected to vote on it tomorrow.
The CARES Act provides more significantly expanded options for relief to both individuals and businesses, including changes to tax policy. Some key provisions include:
Paycheck Protection Program
Under the current draft of the Cares Act is a potential for major economic relief for impacted businesses. The SBA is authorized to guarantee up to $349 billion in 7(a) loans to businesses with not more than 500 employees or the applicable size standard established by the SBA for the industry in which the business operates, if greater. The loan period for this program would begin on February 15, 2020, and end on December 31, 2020.
Eligibility:
Operational on February 15, 2020, and had employees for whom the borrower paid salaries and payroll taxes, or paid independent contractors, and is substantially impacted by public health restrictions related to COVID-19. (Eligible borrowers would be required to make good faith certification that they have been affected by COVID-19 and will use funds to retain workers and maintain payroll and other debt obligations.) There is no requirement to evaluate the borrowers’ ability to repay the covered loan or that the borrower not be able to find credit elsewhere, unlike the normal 7(a) requirements.
Loan Amount and use:
The lesser of $10 million or the business’s average total monthly payroll costs during the one-year period prior to the loan being made multiplied by 2.5. Payroll costs include salaries, wages, tips, payments for sick leave, insurance premiums and state and local taxes assessed on the compensation of employees (limitations for employees earning over $100,000 per year apply). Loan proceeds may be used to cover payroll costs, mortgage, rent and utility payments, and interest on other debt obligations incurred prior to February 15, 2020.
Other Conditions:
Collateral and personal guarantee requirements would be waived during the covered period.
Deferment of existing SBA loans for up to 6 months.
Lender and borrower fees would be waived.
Government guarantees to the lenders of 7(a) loans are to be increased to 100% through December 31, 2020. After that date, guarantee percentages would return to 75% for loans exceeding $150,000 and 85% for loans equal to or less than $150,000.
A complete deferment of 7(a) loan payments would be allowed for not more than one year and would require SBA to disseminate guidance on the deferment process within 30 days.
Loan Forgiveness
Borrowers will be eligible to apply for loan forgiveness equal to the amount spent by the borrower during an 8-week period after the loan closing date on payroll costs, interest on mortgages, payments of rent, and utility payments, in each case that were in place before February 15, 2020. The amount forgiven is reduced proportionally by any reduction in employees retained compared to the previous year and by the reduction in pay of any employee beyond 25 percent of the prior year’s compensation (considerations for businesses with employees earning in excess of $100K should be considered).
A borrower can rehire workers who have been laid off from February 15, 2020, through April 1, 2020, without having those layoffs counted against them if rehired by June 30th, 2020. Canceled indebtedness shall not be included in the borrower’s taxable income for this year.
Expanded unemployment insurance:
(UI) for workers, including a $600 per week increase in benefits for up to four months and federal funding of UI benefits provided to those not usually eligible for UI, such as the self-employed, independent contractors, and those with limited work history.
Recovery Rebate for individual taxpayers:
The bill would provide a $1,200 refundable tax credit for individuals ($2,400 for joint taxpayers). Additionally, taxpayers with children will receive a flat $500 for each child. The rebates would not be counted as taxable income for recipients, as the rebate is a credit against tax liability and is refundable for taxpayers with no tax liability to offset.
The rebate phases out at $75,000 for singles, $112,500 for heads of household, and $150,000 for joint taxpayers at 5 percent per dollar of qualified income, or $50 per $1,000 earned. It phases out entirely at $99,000 for single taxpayers with no children and $198,000 for joint taxpayers with no children.
2019 or 2018 tax returns will be used to calculate the rebate advanced to taxpayers, but taxpayers eligible for a larger rebate based on 2020 income will receive it in the 2020 tax season.
Miscellaneous:
Other notable tax provisions include changes to the early withdrawal penalty on retirement account distributions, the ability to exclude certain employer student loan payments from taxable income, and business tax provisions like a refundable payroll tax credit and net operating loss carrybacks, among others.