Your questions . . . answered.
Signed into law a week ago by President Donald Trump, the Coronavirus Aid, Relief and Economic Security Act, also known as CARES Act, is a $2 trillion aid package designed to prop up the economy, protect jobs, and help businesses and individuals directly impacted by the coronavirus outbreak.
As the largest economic stimulus injection ever in the history of the United States, the package can be complicated to sort through. We’re here to help. As the founder of mergers and acquisitions consulting firm Hughes Klaiber and a tax partner at accounting firm Citrin Cooperman, we’ve guided countless entrepreneurs through plenty of convoluted bureaucratic matters. Here, we answer questions we’ve fielded about the assistance program to enable beauty businesses to secure available benefits.
What are the key benefits of the CARES Act?
For business owners, an important measure in the aid package is the Paycheck Protection Program designed to support small businesses with their payroll, rent, mortgage interest and utilities expenses. The CARES Act offers a broad range of tax relief and credits as well. For individuals, recovery rebate payments, increased unemployment benefits, a three-month deferral of time to file and pay taxes otherwise due on April 15, and access to retirement funds without penalties are among the chief highlights.
What does the Paycheck Protection Program cover?
The Paycheck Protection Program (PPP) provides small business loans that, under certain circumstances, can be forgiven. It incentivizes companies to keep employees on payroll as well as assists with rent, mortgage interest and utilities payments. Under the plan, a business with less than 500 employees can borrow up to 2.5 times average monthly payroll during the prior 12 months up to $10 million. The loan proceeds can only be applied to payroll, rent, mortgage interest and utilities.
During an eight-week period after the loan is received, any portion of the loan used for the approved purposes will be forgiven as long as wages and workforces haven’t been reduced. Payroll costs are defined as salaries capped at $100,000 on an annualized basis per employee, employee benefits, and state and local taxes. Unlike almost every other loan program for small businesses, there’s no personal guarantee required.
How do businesses apply for the Paycheck Protection Program?
The PPP is administered and guaranteed by the Small Business Administration, but businesses apply through participating banks, including existing SBA lenders and many other banks. The SBA has released a sample application form and indicated banks will begin accepting PPP applications from businesses on April 3. Businesses interested in taking advantage of the program should find out if their banks are participating and, if they are participating, ascertain their application timelines. Most banks will likely develop online application portals. Businesses must disclose average monthly payroll costs from the last 12 months and should have records to prove the costs.
Can a business apply for a PPP loan if it wasn’t profitable last year?
Yes, a business that wasn’t profitable last year can apply.
Can a business apply for a PPP loan if it sells cannabidiol or CBD products?
Yes, businesses that sell CBD products can apply. Only businesses that are federally illegally such as cannabis companies can’t apply.
Do businesses have to pay taxes on any forgiven portion of the PPP loan?
No, portions of the loans that are forgiven aren’t taxable.
How does a PPP loan get forgiven?
After the eight-week period is over, a business must submit a request to its lender with detailed records of its eligible expenses and verification of the number of employees. The lender will decide on the forgiveness within 60 days.
Can businesses use PPP loans to pay third-party logistics firms, manufacturers, press relations agencies and other vendors?
No, they can only use the loan proceeds for payroll, rent, mortgage interest and utility payments. However, businesses can borrow up to $2 million under the SBA Disaster Loan program, also called the Emergency Economic Injury Disaster Loan Assistance (EIDL), for operating expenses, including costs of goods sold, third-party logistics, shipping, marketing, etc. Businesses can’t use disaster loans to buy fixed assets or pay back shareholder loans. The annual interest rate on a disaster loan is 3.75% and the term of the loan can be up to 30 years. All principal and interest payments will be deferred for at least six months.
As of March 30, the SBA rolled out a simplified online application for its Disaster Loan program as a result of the economic harm of the coronavirus outbreak. Once the initial application has been reviewed by an SBA loan officer, businesses will probably receive requests for additional information. The SBA has received an unprecedented number of applications and isn’t providing guidance on the timing of issuing the loans after businesses apply for them. As part of the application process, businesses can request a $10,000 advance, which the SBA plans to deliver directly into bank accounts within three days after application. The advance may not need to be paid back, even if you’re not approved for the actual loan.
Can businesses apply for a PPP loan and a SBA Disaster Loan?
Yes, businesses can apply for both loans, but the proceeds from the PPP loan can only be used for payroll, rent, mortgage interest and utilities. The SBA disaster loan must be used for other types of expenses.
What tax benefits for small businesses are included in the CARES Act?
Some of the tax benefits for small business are:
- Deferral of the employer’s share of the Social Security portion of the payroll tax for taxes due on wages paid in 2020. Half of the deferred taxes will be due on December 31 next year, and the other half will be due on December 31 the year after next year. The deferral doesn’t apply to taxpayers with a PPP loan that’s been forgiven.
- If a business incurred a net operating loss in 2018, 2019 or 2020, it can carry the loss back five years and get a refund on taxes previously paid.
- If a business doesn’t receive a PPP loan, it can claim the Employee Retention Credit. If it has less than 100 employees and experienced a significant decline in revenue or was shut down, it can claim a credit against payroll taxes equal to half of all wages paid after March 12 this year, up to $10,000 per employee.
What obligations do businesses have to pay employees that are home sick, caring for family members suffering from the coronavirus or taking leave to tend to children whose schools are closed?
The Families First Coronavirus Response Act requires businesses with fewer than 500 employees to provide both paid and unpaid leave to employees who need to care for a child whose school or daycare is closed due to COVID-19. The first ten days of leave may be unpaid and, then, paid leave is required at two-thirds of the employee’s regular rate of pay up to $200 per day and $10,000 in total. Employers must also provide 80 hours of paid sick time to employees unable to work due to specified virus-related reasons up to a maximum of $511 per day. However, wages paid under the program qualify for a credit against the employer’s payroll taxes.
Are there any businesses that shouldn’t apply for a PPP loan?
The only businesses that shouldn’t apply for a PPP loan are ones that will not qualify for it to be forgiven and don’t want to create debt. While the interest rate on the debt is extremely low, it’s still debt and affects financial statements. Some of the other provisions in the CARES Act such as the payroll tax deferral and the employee retention credit can create additional cash right now without the possibility of adding debt to the businesses balance sheet in the case that the loan or a portion of the loan isn’t forgiven.
What about benefits for individuals?
Some of the tax benefits for individual taxpayers included in the CARES Act are:
- The ability to defer filing 2019 tax returns and paying any balance due until July 15. Most states have also followed this deferral, but not all. The deferral of the federal tax also applies to the first quarter estimated tax payment for 2020.
- Individuals can withdraw up to $100,000 from retirement plans without incurring the 10% early withdrawal penalty. The amount that is withdrawn will be taxable over a three-year period. However, if the funds are put back into the account within the three-year period, they will not be taxable.
What about individual stimulus checks?
Under the Recovery Rebate provision of the CARES Act, singles and married couples filing separate taxpayers whose adjusted gross income on their last filed tax return for either 2018 or 2019 is less than $75,000 will receive a check for $1,200. If their income is between $75,000 and $99,000, the check will be less than $1,200. Married couples filing as joint taxpayers whose adjusted gross income on their last filed tax return is less than $150,000 will receive $2,400. For income between $150,000 and $198,000, the check will be less than $2,400. Anyone who receives a recovery rebate that has a child under 17 will also receive $500 per child.
It’s not known when the payments will be made, but the U.S. Treasury Department has been directed to provide them as soon as possible. It’s estimated that Americans won’t receive stimulus checks until April 13 and some may wait 20 weeks to get them. Individuals don’t need to submit anything to receive stimulus payments, but must have filed a 2018 or 2019 tax return.
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Sally Anne Hughes founded M&A consulting firm Hughes Klaiber in 2008. She helps guide entrepreneurs through every step of selling a business, from initial planning to a successful exit.
Allison Brack is a certified public accountant and tax partner with Citrin Cooperman. She has more than 25 years of experience providing tax compliance and consulting services to closely-held businesses and their owners.
