The Paycheck Protection Program is a loan program that allows lenders to issue Small Business Administration (SBA) 7(a) small business loans up to a maximum of $10 million or 2.5 times the average monthly payroll costs over the previous year to businesses that have fewer than 500 employees. These “businesses” include sole proprietorships and food service business that employ fewer than 500 people per physical location. The loan proceeds may be used for payroll costs, group health insurance premiums or other healthcare costs. Also included are, salaries and/or commissions, rent, mortgage interest and utilities. Borrowers are required to make a good-faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.
The amount of the loan eligible to be forgiven is the amount spent during the first 8 weeks after the loan is made. Here are the following items:
- Payroll costs, excluding amounts for individuals with compensation greater than $100,000; rent due to a lease in force prior to February 15, 2020;
- Electricity, gas, water, transportation, phone and/or internet access for services which began before February 15, 2020
- Group health insurance premiums and other healthcare costs.
To be eligible for forgiveness, the business must keep the same number of employees from February 15, 2020 through June 30, 2020 that it had from January 1, 2020 through February 14, 2020. Any debt forgiven is not included in taxable income.
The CARES Act provides a payroll tax credit as an incentive to encourage businesses from making layoffs. To be eligible for the credit the operations of the company need to have been fully or partially suspended due to governmental intervention because of the coronavirus OR revenue in 2020 is less than 50% of the revenue from the same quarter in 2019.
Payment of Payroll Taxes Deferred
Employers are eligible to defer payroll taxes due from March 27, 2020 through December 31, 2020. 50% of the payroll tax liability is due December 31, 2021 and 50% is due on December 31, 2022. This relief also applies to the employer portion of self-employment taxes. This provision is not available to businesses who participate in the SBA loan forgiveness program.
Net Operating Loss Carrybacks
The Net operating losses (NOL) accrued in 2018, 2019 or 2020 can now be carried back up to five years. Additionally, the unused losses can be carried forward indefinitely. The NOLs are also able to offset up to 100% of taxable income in 2018, 2019 and 2020 (up from 80%). These changes allow companies with NOLs to amend prior years’ returns to claim refunds of amounts that were previously paid to further enhance current cash flow picture.
The Minimum Tax Credit has been accelerated
The CARES Act allows businesses to claim outstanding Minimum Tax Credits (MTCs) starting in 2019 (originally 2021). The CARES Act allows corporations to claim 100% of AMT credits in 2019. The option also exists to make an election to take the entire refundable credit amount in 2018. You must file the application before December 31, 2020.