Businesses Need to Act Quickly to Secure CARES Act Cash Flow Relief
On March 27th, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. This Client Alert discusses the major provisions of the CARES Act that may be most relevant to you and your business during these unprecedented times.
The CARES Act is over 880 pages and contains many ambiguities. Further guidance from various governmental agencies is still needed. This Client Alert is based upon the best information available, but recommendations could change based upon future guidance.
Our Recommendations to our Business Clients
The CARES Act provides up to $349 billion for the Paycheck Protection Program Loan (a “PPP Loan”) to business to be administered by the Small Business Administration in conjunction with local lenders.
If you are considering applying for a Paycheck Protection Program Loan (a “PPP Loan”), you should contact your principal lender immediately to begin the process. Loans will be available on a first-come, first-served basis and demand is expected to be very high. Time is of the essence to obtain these loans. The amount available for lending under this program could be depleted quickly.
PPP Loans do not require collateral or personal guarantees, and interest rates cannot exceed 4.0% per annum. All or a portion of this loan may be forgivable. Loan proceeds may be used for eligible payroll expenses, rent, benefits, and utilities during the period from February 15, 2020 through June 30, 2020.
Any company that employs no more than 500 employees, was operational on February 15, 2020, and had employees for whom it paid salaries and payroll taxes, or a paid independent contractor, may be eligible for the PPP Loan program. Eligibility is determined by your lender.
The maximum loan amount available will be equal to: (i) the average total monthly payments by the borrower for specified payroll costs incurred during the one-year period before the date on which the loan is made, multiplied by (ii) 2.5, subject to a cap of $10,000,000.
Significantly, the CARES Act provides that PPP Loans are eligible for loan forgiveness equal to the amount spent by the borrower during the eight-week period following loan origination on: (i) rent, (ii) payroll costs (as defined above), (iii) interest on a mortgage, and (iv) utility payments. The amount forgiven may not exceed the principal of the loan. This loan forgiveness effectively makes eligible amounts a grant of free money to your business.
If you do not have a current lender or do not have one that is participating in the PPP Loan program, contact us so that we may provide a referral to SBA lenders in the program.
The Cares Act allows employers to defer payment of the employer share (6.2%) of the social security tax it would otherwise be responsible for paying in 2020, effective for payments due after March 27, 2020. Fifty percent of the deferred payroll taxes are due on December 31, 2021, and the remaining amounts are due on December 31, 2022. No interest or penalties would apply.
Making use of the deferral may help you to conserve cash flow in the near term.
If PPP loan forgiveness occurs, the ability to defer ceases. If you obtain a PPP loan and that loan is forgiven under the CARES Act, the deferred taxes would need to be paid quickly.
The CARES Act provides eligible employers with a refundable credit against payroll tax (Social Security and Railroad Retirement) liability equal to 50% of the first $10,000 in wages per employee (including the value of health plan benefits) which results in a possible $5,000 per employee employment tax credit.
This credit is available for businesses whose operations were fully or partially suspended due to the COVID-19 pandemic. To date, it is uncertain whether the Governor’s shelter in place order or other county orders would allow you to qualify for this credit. We are awaiting further guidance.
The credit is for “qualified wages.” For employers with 100 or fewer full-time employees, all employee wages would qualify for the credit. The credit is capped at the first $10,000 of compensation, including health benefits, paid to the employee. The provision is effective for wages paid or incurred from March 13, 2020 through December 31, 2020.
This credit would be unavailable if you obtain a Paycheck Protection Program loan. Any credits taken would need to be repaid promptly following receipt of loan proceeds.
The decision as to whether to make any modification to existing employment arrangements is a very serious one and can only be made after considering a number of factors, of which the provisions of the CARES Act is only one. Factors such as projections of future revenue, productivity, the loss of key employees, the cost of layoffs, furloughs, or terminations and cash flow are likely of significantly more importance than the provisions of the CARES Act in analyzing potential changes to your workforce. But please note that a reduction in the number of employees or the compensation paid to employees would have a direct impact on the dollar amount of the forgiveness of the PPP Loan that you may be able to obtain.
IF EMERGENCY SICK LEAVE APPLIES TO CALIFORNIA EMPLOYERS, IT APPLIES EFFECTIVE WEDNESDAY, APRIL 1. HENCE IMMEDIATE ATTENTION IS REQUIRED.
The FFCRA provides certain tax credits to offset private employers’ cost of paying emergency sick leave wages, which are capped at either $511 or $200 per day, depending upon why emergency sick leave is available, for eighty (80) hours or ten (10) days. For payments made after April 1, an employer would be eligible for a tax credit toward Social Security taxes equal to 100% of emergency sick leave paid pursuant to the FFCRA.
It is not clear whether the California state-wide stay-at-home order or applicable county orders would satisfy the requirements to receive the tax credits. If so, the payment of emergency sick leave to employees who have been furloughed because they cannot come to work or work remotely will subject to a dollar-for-dollar employment tax credit. If not, there will be no credit. IRS guidance is expected soon.
If you are required to pay emergency sick leave wages, you can reduce the amount of your federal tax deposits, starting for the first deposit that includes emergency sick leave wages, by the emergency sick leave wages paid. If the credit exceeds the federal tax deposit due, you should file a request for an accelerated refund. IRS stated it will process accelerated refund requests within two weeks or less. You should treat the timing as aspirational.
In addition, private employers will be eligible for a further credit toward Social Security taxes for emergency paid family leave wages paid under the Act for payments made after April 1. This credit is capped at $200 per day, up to an aggregate of $10,000. Family leave is available to care for the employee’s child under age 18 whose school or child care provider has been closed or is unavailable due to COVID-19.
The CARES Act expands and accelerates the use of net operating losses (“NOL”) for businesses by allowing NOL carrybacks to apply to 100% of the prior year income. The provision allows for an NOL arising in 2018, 2019, or this year, to be carried back five years.
Businesses with taxable income in the prior five years and an NOL in 2018 or 2019 will benefit from filing amended return carrying back a 2018 NOL and by filing a Request for Tentative Allowance (Form 1045 for individuals and Form 1139 for corporations), to obtain a tentative allowance or “quick refund” in 90 days for a 2019 NOL carryback. These changes will allow companies to convert currently unusable losses to cash in as little as 90 days.
The CARES Act is a major, broad, sweeping, and complicated relief package for those affected by the COVID-19 crisis. Like any complicated emergency relief package adopted quickly, there are ambiguities, inconsistencies, and many limitations applicable to the relief provided by the CARES Act. Although swift actions should be taken, it is equally important to carefully analyze your individual circumstances with your accountants, tax or other financial advisors, and attorneys.
Boutin Jones lawyers are here to help you navigate the opportunities presented by the CARES Act. The contact information for our CARES Act Team is:
Jim Leet: firstname.lastname@example.org
Dennis Michaels: email@example.com
Iain Mickle: firstname.lastname@example.org
Bob Rubin: email@example.com
Legal disclaimer: The information in this client alert (i) is provided for general informational purposes only, (ii) is not provided in the course of and does not create or constitute an attorney-client relationship, (iii) is not intended as a solicitation, (iv) is not intended to convey or constitute legal advice, and (v) is not a substitute for obtaining legal advice from a qualified attorney. You should not act upon any of the information in this article without first seeking qualified professional counsel on your specific matter.