Dear Clients and Friends of Edward Walsh and Associates, CPA,
While we all are feeling the effects of the COVID-19/coronavirus on our business operations and cash flows, there are certain provisions recently passed by the U.S. Government that may help mitigate the effects of this crisis on your business operations. The following is a brief summary of some of those provisions:
Paycheck Protection Loan Program
This Program may be the most beneficial to many small businesses as it allows businesses to borrow funds that can be utilized to provide cash flow assistance to maintaining employment and paying wages to employees and business owners alike.
Eligible and affected small businesses would be able to borrow up to 250% of their average monthly payroll of the prior twelve-month period (with limitations). These funds then can be utilized to pay for employee compensation plus rent, mortgage payments and utilities. The portion that is utilized and spent on these qualified costs then is eligible for loan forgiveness as long as the employer maintains both the number of employees and the amount of wages as compared to the lookback period (effectively, if you reduce wages or lay off employees, then the amount forgiven is reduced on a pro-rata basis).
For example, if an employer paid $300,000 in wages during the 12-month prior lookback period, the average monthly wages would be $25,000, and the maximum loan amount under this program would be 250% of this or $62,500. If these funds are then spent on the qualified costs (compensation, rent, mortgage, and utilities) and if the number of employees and amount of pay was not reduced, then the entire loan balance would be eligible for forgiveness. As an added benefit, the amount forgiven will not be included as taxable income to the company.
To apply for a COVID-19 Economic Injury Disaster Loan, click here.
The SBA also is expanding other small business loan programs. Many small businesses and non-profits (subject to certain limitations) can qualify for these loans. The loans, which are issued by participating banks and other qualified lenders and guaranteed by the SBA, can be utilized to fund a variety of small business operational and capital needs. Please see your bank or qualified SBA lender for more details.
Employee Retention Credit
The Act provides a refundable payroll tax credit equal to 50 percent of wages paid by employers during the coronavirus crisis. The credit is provided for the first $10,000 of compensation (including health benefits) paid to an employee starting March 13, 2020 through December 31, 2020 with a maximum credit of $5,000 per eligible employee.
Generally, employers qualifying for this credit include those whose: 1) operations were fully or partially suspended due to a coronavirus shut-down order; or 2) gross receipts declined by more than 50 percent as compared to the same prior year quarter. And, it can apply to exempt organizations.
The credit is based upon qualified employee wages. Qualified wages for employees with 100 or fewer full-time employees include all employee wages, even if the employer is closed due to a shut-down order. This benefit may be limited where the employee wages are used to generate other tax credits (no double dipping) or if the employer accepts a covered loan (the Paycheck Protection Loan Program - see above) under the Small Business Act.
Deferral of Employer’s Share of Payroll Taxes
Employers and self-employed individuals can defer payment of the employer’s share of the Social Security tax they are otherwise responsible for paying (generally a 6.2 percent tax on wages or earned income) for the 2020 tax year. The deferred employment tax can be paid over the two following tax years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022.
Net Operating Losses
The CARES Act makes substantive changes to code section 172 Net Operating Loss Carryovers (NOLs), but only for the tax years beginning in 2018 through 2020. Under this temporary provision, NOLs can be carried back five years, and NOLs are not subject to any taxable income limitations. Any taxpayers with already filed 2018 or 2019 tax returns reporting NOLs subject to the TCJA rules (either the taxable income limitation or prohibition against carrybacks) may consider amending tax returns to claim additional losses and possibly carry back any unused NOLs. Additionally, any NOLs arising with unfiled 2019 tax returns will benefit from these new temporary rules. Under both situations, NOLs can be carried back to former tax years and applied against income taxed at pre-TCJA rates, potentially resulting in a permanent benefit.
There are other technical provisions recently enacted that may benefit certain businesses such as (1) reduction on the limitation of business interest expense; (2) delay in the implementation of the Excess Business Loss Limitation; (3) changes to the depreciation deduction calculation regarding Qualified Improvement Property; (4) provisions to receive payroll tax payment credits for temporary compensation paid to employees who are forced to quarantine for COVID-19 illness related to themselves or qualified family members.
If you would like to discuss any of this further, please contact Edward Walsh and Associates at (409) 763-4626 or firstname.lastname@example.org.
Edward J. Walsh, III, CPA, CFE