Today Congress passed and the President signed into law the CARES Act including the Paycheck Protection Program. The CARES ACT contains a number of important tax provisions, while the Paycheck Protection Program provision of the CARES Act offers businesses immediate access to liquidity through a new loan program tied to prior year payroll. We have highlighted key details of both below.
Today Congress passed and the President signed into law the CARES Act including the Paycheck Protection Program. The CARES ACT contains a number of important tax provisions, while the Paycheck Protection Program provision of the CARES Act offers businesses immediate access to liquidity through a new loan program tied to prior year payroll. We have highlighted key details of both below.
Today Congress passed and the President signed into law the CARES Act including the Paycheck Protection Program. The CARES ACT contains a number of important tax provisions, while the Paycheck Protection Program provision of the CARES Act offers businesses immediate access to liquidity through a new loan program tied to prior year payroll. We have highlighted key details of both below.
The Paycheck Protection Program provision of the CARES Act offers businesses immediate access to liquidity through a new loan program tied to prior year payroll. Loans made under the Paycheck Protection Program are backed 100% by the federal government. Eligible borrowers will find the lending requirements under the Paycheck Protection Program to be significantly less onerous than provisions found in the SBA’s Disaster Loan program.
Eligibility
Businesses in operation on February 15, 2020, that had had employees or paid independent contractors on that date are eligible for the Paycheck Protection Program.
Small Business Administration (SBA) loans are typically governed by borrower size constraints. These constraints frequently limit a business’s access to SBA loans. The size constraints are typically tied to revenue and employment levels. Each of these constraints has been relaxed in the CARES Act that President Trump signed into law on March 27, 2020. The CARES Act provides that businesses with (a) 500 or fewer full-time, part-time or other employees or (b) if higher, the maximum number specified for the type of business in the SBA’s Table of Small Business Size Standards are eligible to participate. The calculation of employees will be very important for businesses near 500 total employees. Consideration of this issue is beyond the scope of this article.
Exceptions and Special Rules
Special rules exist for businesses with fewer than 500 employees in one location, categorized with a 72 NAICS Code (hospitality/food service industries). A waiver of the affiliation rules exists for businesses operating as a franchise, where the franchise has been assigned an identifier code by the SBA. The SBA franchise directory can be accessed here. Businesses operating franchises not included in this directory, who can benefit from this waiver, should consider requesting the franchisor become listed.
Loan Terms
An eligible business may borrow the lesser of $10 million or 2.5 times the average monthly payments by the applicant for payroll costs. If over the last 12 months your average monthly payroll was $1 million, your business could borrow $2.5 million ($1m x 2.5). The CARES Act does not require collateral or personal guarantees for a covered loan. The loan term is a maximum of 10 years at a maximum interest rate of 4%. Loan payments will be deferred for the first 6-12 months.
Loan Forgiveness
The act allows for covered loan forgiveness if the borrower meets certain criteria. The loan forgiveness is equal to payroll costs (including healthcare benefits) + mortgage costs + rent + utilities during the covered period. The covered period begins on the origination date of the loan and ends eight weeks later.
The loan forgiveness is reduced if the borrower:
There is no reduction if a borrower re-hires employees who were terminated.
Forgiven amounts are excluded from taxable income.
The Payroll Protection Program included in the CARES Act represents a unique opportunity for businesses to borrow money on very favorable terms. The loan forgiveness aspect of the CARES Act represents a rare opportunity for business to recapitalize on a tax-free basis. We expect there to be significant demand for loans under this program.
View our Paycheck Protection Program (PPP) FAQs >>
Download our Paycheck Protection Program Loan Toolkit >>
Cash Payments
Relaxation of restrictions on use of retirement funds
Waives the required minimum distribution rules for certain defined contribution plans and IRAs for calendar year 2020.
Provides for a $300 deduction for charitable contributions for all taxpayers and modifies limitations on charitable contributions made during 2020
Exclusion for certain employer payments of student loans
Employee retention credit for employers subject to closure due to COVID-19
Delay of payment of employer payroll taxes
Modifications for net operating losses
Modification of limitation on losses for taxpayers other than corporations
Modification of credit for prior year minimum tax liability of corporations
Modification of limitation on business interest
Technical amendment regarding qualified improvement property
Temporary exception from excise tax for alcohol used to produce hand sanitizer
We will continue to keep you apprised as additional information and guidance is provided. If you have specific questions, please contact your blum partner or contact us here.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.
Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation