EDITOR’S NOTE: This is the second part of a two-part series pertaining to the Coronavirus Aid, Relief and Economic Security Act (called the “CARES Act”). The focus of this article is to provide guidance for businesses as they cope with the effects of the pandemic.
Effective March 27, 2020, employers will receive several types of relief to counter the negative impact experienced from the virus currently ravaging our country. The goal of the law is to keep people employed by supporting small- and mid-sized businesses with disaster loans, payroll loans and tax credits.
Eligible employers may claim a credit against payroll taxes equal to fifty percent (50%) of qualified wages paid to employees who are not working due to the employer’s full or partial cessation of business operations or a significant decline in gross receipts. The credit may be claimed quarterly but the amount of wages, including health insurance benefits, for which the credit may be claimed is limited to $10,000 in aggregate per employee for all quarters. This particular credit applies to wages paid after March 12, 2020, and before January 1, 2021.
Payroll tax deferral is another relief provision within the Act that allows employers to retain cash for the continued payment of employees during times of quarantine or shutdown. This provision applies to payroll taxes that are incurred for the period March 27, 2020 through December 31, 2020. The FICA and Medicare portions of the payroll incurred by employers are qualified for deferral. Payment of the deferred payroll taxes are due one-half (50%) on December 31, 2021 and the remainder due on December 31, 2022.
One of the most significant benefits of the Act is the ability to carry Net Operating Losses (NOL) arising in tax years 2018, 2019 and 2020 back five (5) years to recapture potential taxes paid for the years dating back to 2013. Another excellent bonus for businesses is the ability to offset NOLs fully against income earned before January 1, 2021. Prior law required a limitation of NOL to 80% of taxable income.
To further assist small- and mid-sized businesses to retain employees, the Act authorizes the Small Business Administration (SBA) to provide oversight of the Paycheck Protection Program. This program provides employers expedited loans to retain employees for the period of May 1, 2020 through June 30, 2020. The stated interest rate for the program loans is 1% APR. At this level of interest, one would be receiving very favorable terms. However, the news gets better! If the employer provides adequate documentation of the loan proceeds utilized for payroll costs, rent, mortgage interest, employee benefits, and other restricted uses, the loan converts to a grant. In other words, good documentation can provide you free payroll costs for two months. This is much needed relief for many businesses disrupted during the virus.
Lastly, the Act corrects an area of Congressional oversight by defining qualified improvement property as 15-year property thereby allowing for immediate expensing in the year of purchase. To many small- and mid-sized businesses, the ability to control the depreciation of assets in a manner that minimizes tax burdens will allow them to control their cash flow to their advantage. Often these businesses must make the decision to expand their physical plant or purchase needed equipment on a tax-relevant basis. If the ability to expend money provides an opportunity to save taxes while growing their business, it is a much easier decision for the owners.
Although the CARES Act meets its objectives and provides businesses relief, many believe more can be done. The pandemic has stricken many companies in a significant manner such that they may not continue operations or reopen. Bankruptcy laws are of some assistance during these difficult times but one would be remiss to fail to apply for SBA loan assistance to continue their business activities. Expedited applications and disaster relief loans that provide for principal forgiveness are now available through the SBA.
It is vital for our business owners and community that we retain, and expand, the number of jobs available. Take advantage of these excellent loan and grant opportunities. You may find additional information about the solutions you seek at www.sba.gov.
We will learn from the challenges faced during the pandemic. Our community, state and country will return stronger and more resilient through the courageous acts of our first responders, critical business functions and employees who maintain the infrastructure for our citizens. Seek out assistance from your CPA and financial advisor. This is a time that we must seek unity in our community.
Registered Principal Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Jimmy J. Williams is an Investment Advisor Representative of Compass Capital Management, LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management, LLC are not affiliated. 321 S. 3rd, Ste. 4, McAlester, OK 74501. Cambridge does not offer legal and tax advice. Please consult your legal and tax advisor for specific estate and income tax planning strategies.