Two recent pieces of legislation, the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contain provisions intended to provide assistance to small businesses affected by the COVID-19 pandemic. Many of the reliefs are also available to aliens with proper documentation. The law does not discriminate between US citizens and legal immigrants. However, it is not clear yet if the funding could be considered public charge by the government and therefore make immigrants inadmissible under the new rule enacted on February 24, 2020. These relief provisions include:
- PAYCHECK PROTECTION PROGRAM (PPP). Under the PPP, employers with up to 500 employees may apply for SBA loans in an amount up to 2.5 times their average monthly payroll costs, up to $10 million, to pay payroll costs, rent, utilities and other expenses. Employers in the restaurant and hospitality industry may be able to exceed the 500-employee limit. Most importantly, if the borrower maintains payroll at pre-crisis levels, up to the entire principal amount of the loan may be forgiven. Congress has allocated $349 billion for these loans, but demand will be extremely high. Lenders may begin accepting applications on April 3, 2020, and loans will be approved on a first-come, first-served basis.
Any business, nonprofit, veterans organization, or tribal business that has no more than 500 employees (with certain exceptions for certain industries) is eligible. Eligible businesses also include individuals who operate as sole proprietors, independent contractors and self-employed individuals.
Any business that has a NAICS code beginning with 72 (mostly, hospitality and food service businesses), which has multiple locations, and has fewer than 500 employees per location, is eligible even if in the aggregate it has more than 500 employees.
Note that the SBA’s general affiliation rules apply to PPP loans, which means that members of a controlled group will be counted together for purposes of determining the applicant’s number of employees. For example, companies that have a private equity and venture capital investor who has a control investment (either by maintaining a controlling percentage or through contractual rights) must include all of the employees from the portfolio companies of their control investor in determining whether they have fewer than 500 employees. The PPP affiliation rules have been relaxed, however, for purposes of:
- Businesses with a NAICS code beginning with 72 (mostly, hospitality and food service businesses);
- Some businesses operating as a franchise; and
- Any business which has received financial assistance under Section 301 of the Small Business Investment Act of 1958.
Good Faith Certification of Harm
An applicant for a PPP loan will need to certify that the loan is needed to support its ongoing operations in the uncertain current economic conditions, the proceeds will be used for eligible purposes, and that the applicant does not have another application pending for the same purpose and has not received another duplicative PPP loan.
Maximum Loan Amount
Each eligible recipient can receive a maximum loan equal to the lesser of $10 million or 2.5 times the average monthly payroll costs during the prior 12-month period. Payroll costs include: salary; wage; commissions; cash tips or equivalents; payments for vacation or parental, family or medical leave; group health care insurance premiums; retirement benefits; and state and local taxes on such compensation. For purposes of calculating salary, only amounts up to $100,000 per employee can be included, and compensation for individuals who reside outside the U.S. must be excluded. Companies who have a seasonal workforce can use a different measuring period for their average payroll costs.
Use of Proceeds
The proceeds of a PPP loan can be used to pay payroll costs (as described above, including the $100,000 annual salary limitation), interest (but not principal) on mortgages, rent, utilities and interest incurred on debt incurred prior to February 15, 2020. To receive the maximum amount of loan forgiveness, payroll costs will need to be 75 percent or more of the loan amount.
Forgiveness of Principal Amount
A major attraction of PPP loans is that up to the entire principal amount may be forgiven. The amount of forgiven debt will not be considered income from the cancellation of indebtedness.
The amount eligible for forgiveness is based on the borrower’s payroll costs, mortgage interest, rent and eligible utility payments made during the eight-week period following receipt of the loan, provided that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. The amount eligible for forgiveness will be reduced if, during the eight-week period after receipt of the loan, the average number of full-time equivalent employees declines (compared to average monthly full-time equivalents for the period from February 15, 2019 to June 30, 2019), or if the salary and wages of employees who earn less than $100,000 is reduced by more than 25 percent. Reducing compensation of employees who earn more than $100,000 will not result in reduction in the amount forgiven.
Employers who terminated employees (or reduced their salaries or wages) after February 15, 2020, can rehire (or reinstate the salaries or wages of) those employees prior to June 30, 2020, and not have the initial termination or reduction affect the calculation of the amount eligible for forgiveness.
In order to be eligible for forgiveness of a PPP loan, a borrower must submit an application requesting forgiveness, together with:
- Documentation supporting the claimed payroll costs, mortgage interest payments, rent payments and eligible utility payments; and
- A certification from a representative of the borrower that:
-the documentation presented is true and correct, and
-the amount requested for forgiveness was used for eligible expenses.
- ECONOMIC INJURY LOAN PROGRAM. In response to the Coronavirus (COVID-19) pandemic, small business owners in all U.S. states, Washington D.C., and territories are eligible to apply for an Economic Injury Disaster Loan advance of up to $10,000. This advance will provide economic relief to businesses that are currently experiencing a temporary loss of revenue. Funds will be made available following a successful application. This loan advance will not have to be repaid.
The SBA’s Economic Injury Disaster Loan provides vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing as a result of the COVID-19 pandemic. This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19.
Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries. The Economic Injury Disaster Loan advance funds will be made available within days of a successful application, and this loan advance will not have to be repaid.
- EMPLOYEE RETENTION CREDITS (Retention Credits). In lieu of obtaining a forgivable loan under the PPP, an employer who has had to reduce or suspend operations due to COVID-19 can claim a refundable tax credit of 50 percent of the qualified wages paid to employees, up to $10,000 of wages per employee (for a maximum credit of $5,000 per employee). If the employer has 100 or fewer full-time employees in 2019, the credit can be claimed whether or not the employees are still providing services, but if the employer had more than 100 full-time employees in 2019, the credit is based on qualified wages paid to employees who are not providing services.
Claiming the Credit
Employers who pay qualified wages can reimburse themselves the amount of the credit by retaining amounts of federal employment taxes that would otherwise have been paid to the IRS on quarterly employment tax returns (Form 941) for wages paid between March 13, 2020 and December 31, 2020. If there are insufficient payroll deposits to cover the cost of qualified wages, employers will be able to file a request with the IRS.
- ENHANCED UNEMPLOYMENT BENEFITS. The federal government has added $600 per week to unemployment benefits. As a result, lower paid employees may make more money if they are laid off. State-level benefits will be increased by $600 per week until July 31, 2020. Finally, the federal government will provide an additional 13 weeks of benefits on top of the state program, up to a cap of 39 weeks.
- PAYROLL TAX DEFERAL. Payroll tax payments due in 2020 for the employer portion of Social Security tax may be deferred until 2021 and 2022.
- TAX RELIEF. Various tax provisions provide income tax relief for 2020 and, in some cases, prior years. This includes fixing the so-called “retail glitch,” permitting the carryback of net operating losses and expanding the deductibility of business interest expense. Retail Glitch. An error in the TCJA limited the ability of taxpayers to expense “qualified improvement property” (QIP). Retroactive to 2018, QIP placed in service from the 2018 taxable year and going forward can be expensed, thus reducing the business’s tax burden.
NOLs. The TCJA eliminated the ability to carry back a net operating loss (NOL) to prior years and limited NOL carryforwards to 80 percent of taxable income. The CARES Act allows NOLs created in 2018, 2019 or 2020 to be carried back five years and suspends the 80 percent limitation until 2021. Corporations that had tax losses in 2019 but taxable income in prior years generally should file 2019 returns as soon as possible to take advantage of this expanded carryback and get cash refunds in hand.
Excess Business Losses. NOLs generated by noncorporate taxpayers were limited by the TCJA to a cap of $250,000 ($500,000 if filing a joint return). The limitation is suspended for 2018, 2019 and 2020.
Deductibility of Business Interest Expense. The deduction for business interest expense was limited by the TCJA to 30 percent of a taxpayer’s “adjusted taxable income.” This limitation was raised to 50 percent for 2019 and 2020 (with special rules for partnerships). Additionally, the 2020 limitation can be based off of the taxpayer’s 2019 adjusted taxable income (since the 2020 number may be significantly lower).
AMT. The corporate alternative minimum tax (AMT) was repealed by the TCJA which left some taxpayers with AMT credit carryforwards. The CARES Act accelerates any remaining credit carryforwards.
- OTHER SBA RELIEF (Economic Disaster Loans). The CARES Act allocates an additional $10 billion for economic injury disaster loans and relaxes the requirements for obtaining economic injury disaster loans and emergency advances. While such loans are part of an existing SBA loan program (primarily for regions hit by natural disasters), the CARES Act treats the entire country as being under an emergency because of COVID-19. The CARES Act also relaxes several of the requirements for obtaining economic injury disaster loans, including: no personal guarantees on loans of up to $200,000; the applicant doesn’t have to be in business for at least a year prior to obtaining the loan (although must have been in business on January 31, 2020); no requirement to prove inability to obtain credit from another source; and no requirement to provide tax returns as part of the application (the lender may rely on the applicant’s credit score). Applicants are also eligible for a $10,000 advance on their loan, which would be paid within three days of applying for the loan, and is forgivable even if the loan is not awarded. Economic disaster loans (other than the $10,000 advance), require repayment, but on generally favorable terms (2.75-3.75 percent interest, with up to a 30-year term).
Required Information for Application
- Government issued personal identification of all individual applicants (driver’s license, state or federal ID, or passport).
- Federal Business tax returns for the last 2 completed years for all individual applicants, if available.
- Employer tax documentation.
- Personal tax returns for the last 2 completed years with attached Schedule C for all individual applicants, if available and where appropriate.
- Additional information that the applicant believes would assist the Loan Review Committee in making its decision (such as a loan summary).