Historic Economic Stimulus Package Becomes Law

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Historic Economic Stimulus Package Becomes Law

This past Friday the President signed the Coronavirus Aid, Relief, and Economic Security Act (known as the “CARES” Act) into law in an effort to provide further economic relief to individuals and small businesses across the United States.  The CARES Act is the third significant piece of legislation enacted over the past couple weeks by Congress to hopefully stabilize the U.S. economy during the COVID-19 outbreak and its likely not the last.  So, what do you need to know?

For Our Business Clients

The Paycheck Protection Program

The cornerstone “life-line” provided under the bill requiring the attention of every business impacted by the pandemic is the Paycheck Protection Program. Through section 7(a) of the Small Business Act, the Small Business Administration (SBA) will administer forgivable loans of up to $10 million per company to provide cash-flow assistance to employers who maintain their payroll during this emergency, help workers remain employed and enable affected small businesses to recover after this crisis.

Who is eligible?

  • Most businesses with 500 employees or less (profit and nonprofit)
  • Self-employed individuals and independent contractors
  • Companies that have an existing SBA loan under the Economic Injury Disaster Loan (EIDL) program for COVID-19 are eligible but their existing EIDL loan will be factored into the total limit allowed under the 7(a) program and converted.
  • Borrowers must certify in good faith that the funds are needed to support the ongoing operations during this period of economic uncertainty and that the funds will be used to retain workers, maintain payroll and pay certain operating expenses identified below.

What are the loan terms?

  • The maximum loan amount is calculated at the lesser of 2.5 times your average monthly payroll costs incurred during the 1 year period before the date on which the loan was made or $10 million.
  • “Payroll costs” for determining the maximum loan amount are defined as salary, wages, commissions, tips, vacation pay, sick leave, cost of health, retirement benefit and self-employment net income.
  • The loan proceeds can be used for
    • Paid sick, medical or family leave
    • Healthcare benefits
    • Employee salaries (for those employees making less than $100,000)
    • Utilities
    • Mortgage payments and/or rent
    • Servicing of other debt obligations

What are the loan terms? (continued)

  • The maximum interest rate is set at 4%.
  • Deferral of payments for 6 -12 months with no prepayment fees.
  • No collateral or personal guarantee requirements during the covered period (February 15, 2020 – June 30, 2020).
  • 100% SBA guarantee with no SBA fees.
  • Loans may be completely forgiven if employers use the loan proceeds for qualifying costs and maintain their payroll during the covered period (February 15, 2020 – June 30, 2020). The loan forgiveness would not be taxable.  Businesess will need to apply for loan forgiveness and provide documentation detailing how the loan proceeds were used.
  • The loan forgiveness is reduced proportionate to reductions in workforce and by the reduction in pay of any employee in excess of 25 percent during the covered period as compared to previous periods.  If employees are rehired prior to the end of the covered period (June 30), businesses will be able to preserve the loan forgiveness.
  • Any outstanding balance not forgiven or repaid by December 31, 2020 will convert to a maximum 10-year term loan at 4% interest remaining fully guaranteed by the SBA.

What should you do?

We recommend that you determine your average monthly payroll costs as outlined above and contact your lender as soon as possible.  Unlike the Economic Injury Disaster Loan (EIDL) program mentioned below, this program is not a loan administered by the SBA where companies are required to apply directly with the SBA.  Instead, businesses will need to contact an authorized SBA lender who will process and service the loan.  Lenders will be compensated by the Federal government at 1-5% of the loan amount depending on loan size.  Accordingly, we are urging all our clients that have been affected by the COVID-19 outbreak to contact their SBA lender as soon as possible to start the process.  If you are not currently banking with an SBA lender, please reach out to your BSB relationship manager and we can help you find one.

Please note that Paycheck Protection Program is separate from the Economic Injury Disaster Loan (EIDL) program and you CANNOT participate in both.  If you have an EIDL loan in place at the time of the 7(a) loan application, the EIDL loan will be converted. The EIDL is an existing economic relief program administered by the SBA in natural disaster situations.  Earlier during this pandemic, the Federal government invoked this program and funded an additional $7.0 billion in low-interest disaster loans to small businesses.  The EIDL requires businesses to apply directly with the SBA to qualify for loans up to $2.0 million at 3.75% interest and repayment terms of up to 30 years.

Business Tax Relief

Payroll Tax Deferrals and Employee Retention Tax Credit

The law provides a quarterly refundable payroll tax credit equal to 50% of “qualified wages” paid by employers that were carrying on a trade or business in 2020 to employees during the COVID-19 crisis, where the employer’s

  • operations were fully or partially suspended due to a COVID-19-related shutdown order, or
  • gross receipts declined by more than 50% when compared to the same quarter in the previous year.

Payroll Tax Deferrals and Employee Retention Tax Credit (continued)

The credit is provided for the first $10,000 in compensation (i.e., up to a $5,000 tax credit), including health benefits, paid to an eligible employee, and is provided for wages paid or incurred after March 12, 2020 through the end of the year. This payroll tax credit is available to tax exempt organizations described in Section 501(c) of the Internal Revenue Code (Code). An employer cannot take this payroll

tax credit if the employer receives a SBA 7(a) loan under the Act.

  • For employers with more than 100 full-time employees (based on the average number of full-time employees in 2019), “qualified wages” are wages paid to employees when they are not working due to either (1) or (2) above;
  • For employers with 100 or fewer full-time employees (based on the average number of full-time employees in 2019), all employee wages qualify for this credit, whether or not the employee is able to work during the quarterly period with circumstances described in either (1) or (2) above.
  • The bill also allows employers to defer payment of the 6.2% employer share of the Social Security tax payable through December 31, 2020, and requires that the deferred payroll tax be paid over the following two years, with half of the tax amount required to be paid by December 31, 2021, and the other half by December 31, 2022. An employer may not defer payroll tax if the employer received forgiveness of a SBA 7(a) loan.

Net Operating Losses

The legislation allows for a five-year carryback of net operating losses (NOLs) arising in 2018, 2019 or 2020 by a business.  Businesses will be able to amend or modify tax returns for tax years dating back to as early as 2013 in order to take advantage of the carryback.  Under the old law, losses were generally not permitted to be carried back.  They could only be carried forward.

Additionally, the bill allows for NOLs arising before January 1, 2021 to fully offset income.  Under the old law, NOLs were limited to 80 percent of taxable income.

Qualified Improvement Property

The CARES Act corrects a drafting error from the 2017 Tax Cuts and Jobs Act that inadvertently left qualified improvement property as 39-year property and not eligible for bonus depreciation.  Under the new law, qualified improvement property is defined as 15-year property and is therefore eligible for 100 percent bonus depreciation.  This change is effective for property acquired and placed in service after September 27, 2017.

Unemployment Insurance

The bill enables individuals not normally eligible for unemployment assistance (self-employed, independent contractors, those with limited work history, etc.) to qualify for such benefits if they are unable to work as a direct result of the coronavirus public health emergency.  In addition, the new law does the following to supplement unemployment benefits:

  • Provides payments to states to reimburse nonprofits, government agencies, and Indian tribes for half of the costs they incur through the end of the year to pay unemployment benefits;
  • Provides individuals with an additional $600 of unemployment benefits per week, for up to four months, above the benefits they receive from their respective state unemployment office, and provides an additional 13 weeks of unemployment benefits through the end of the year for those who remain unemployed after they are no longer eligible for state unemployment benefits;
  • Provides funding to states that choose to waive one-week waiting periods for unemployment eligibility in order to pay the costs of the first week of unemployment benefits;
  • Provides funding to states to support “short-time compensation” programs, where employers reduce employee hours instead of laying off workers and employees with reduced hours receive a pro-rated unemployment benefit.

For Our Individual Clients

Individual Tax Relief

Cash Payments

The most publicized provision of the CARES Act is the $1,200 immediate stimulus checks for individual taxpayers.  The rebate amounts are advance refunds of credits against 2020 income taxes and equals $1,200 for single taxpayers, or $2,400 for joint filers, with a $500 credit for each child.  The rebates begin to phase out at $75,000 for single taxpayer, $112,500 for heads of households (HOH), and $150,000 for joint filers.  The phase out thresholds are based upon adjusted gross income from your 2018 income tax returns (unless a 2019 return has already been filed).  The rebates are completely phase out at adjusted gross income in excess of $99,000 (single), $136,500 (HOH) and $198,000 (joint filers).

Retirement Plans

In order to access cash, the bill liberalizes the retirement plan rules with respect to early distributions and required minimum distributions. Withdrawals up to $100,000 from qualified retirement plans for coronavirus related distributions during the 2020 tax year will not be subject to the 10 percent early withdrawal penalty. A coronavirus distribution is one to an individual (or spouse of an individual) diagnosed with COVID-19 with a CDC-approved test, or to an individual who experiences adverse financial consequences as a result of quarantine, business closure, layoff, or reduced hours due to the virus. Any income attributable to the withdrawal is subject to tax over a 3-year period. In addition, taxpayers may recontribute the withdrawn amounts to a qualified retirement plan without regard to annual caps on contributions if made within three years.

The bill also waives all required minimum distributions for 2020, regardless of whether the taxpayer has been impacted by the pandemic.