A summary of major provisions of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act affecting small businesses and self-employed taxpayers:
Paycheck Protection Loans
The CARES Act authorizes the Small Business Administration (SBA) to extend special forgivable loans to small businesses (generally, businesses with fewer than 500 employees). Businesses (including self- employed individuals) may borrow up to $10,000,000 to pay employee wages, health and retirement benefits, and certain other expenses such as mortgage interest, rent, utilities, and other interest expense.
If used for its intended purpose, a Paycheck Protection Loan is a non-recourse loan and does not require collateral or a personal guarantee. Loan fees will be waived, and interest cannot exceed 4%. Applicants must provide documentation to substantiate their payroll, mortgage, lease, utility, and interest expenses and certify that the documentation is true and correct and that the loan proceeds will be used for authorized purposes.
Borrowers may defer loan repayments for at least six months and up to twelve months. A Paycheck Protection Loan will be fully forgiven if the borrower does not reduce its workforce and/or payroll below certain calculated thresholds and has qualified expenses equal to or exceeding the loan amount. If the borrower does reduce its workforce and/or payroll, the loan can still be partially forgiven. Forgiven amounts will be treated as canceled indebtedness, which will not be included in gross income for tax purposes. Any remaining loan balance that is not forgiven must be repaid within two years.
Employee Retention Credit
Eligible businesses (including self-employed individuals) may claim a refundable credit of 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee. Businesses are eligible if their operations were fully or partially suspended in 2020 due to a government ordered COVID-19 shutdown. Businesses are also eligible if their gross receipts for any quarter in 2020 decline to less than 50% of gross receipts when compared to the same quarter in the prior year. Businesses that receive an SBA Paycheck Protection Loan cannot claim this credit, and the credit cannot be claimed for wages paid under the paid sick leave or paid family leave provisions of the Families First Coronavirus Response Act.
Businesses with more than 100 full-time employees may only claim the retention credit for wages paid to employees who are not providing services because of a COVID-19-related shutdown or decline in gross receipts. Businesses with fewer than 100 full-time employees may claim the retention credit for all wages paid to all employees.
Deferral of Employer Payroll Taxes
Businesses (including self-employed individuals) may defer the employer portion of Social Security taxes for the remainder of 2020. Any amount deferred will be due in future years, with 50% of the tax payable by December 31, 2021 and the balance payable by December 31, 2022. Businesses that receive forgiveness for any portion of an SBA Paycheck Protection Loan cannot defer payroll taxes.
Net Operating Losses
The 2017 Tax Cuts and Jobs Act (TCJA) limited the use of net operating losses (NOLs) to 80% of taxable income and eliminated NOL carrybacks to prior years. Under the CARES Act, businesses may use 100% of NOL carryforwards to offset taxable income for 2018, 2019, and 2020. Businesses may also carry back NOLs generated during 2018, 2019, and 2020 for up to five years to receive refunds of taxes paid for years as early as 2013. The TCJA limitations on NOLs will be reinstated in 2021.
Excess Loss Limitations
The 2017 Tax Cuts and Jobs Act limited the ability of sole proprietors and owners of pass-through entities to deduct certain excess losses. The CARES Act suspends these rules for all years before 2021. Prior-year returns may be amended to claim full loss deductions.
Qualified Improvement Property
The 2017 Tax Cuts and Jobs Act expanded the definition of “qualified improvement property,” but inadvertently defined such property as having a 39-year life instead of the 15-year life lawmakers intended. The CARES Act fixes this error and classifies qualified improvement property as 15-year property eligible for depreciation. This amendment is effective for all such property placed in service after December 31, 2017.
If you have questions about how these provisions might benefit your business situation, please feel free to contact one of our CPAs at (616) 642-9467 or request a complimentary accounting consultation.
By: Chuk Gottschall
Photo: Saranac MI American Legion