ABOUT
IMPORTANT INFORMATION
Below you will find our summaries of the CARES ACT that will most likely be applicable to all of you. Disclaimer: This information applies only to NJ residents and we are only able to assist clients in the state of New Jersey
Small and Mid-Size Business Relief Provisions
Forgivable Loan (Paycheck Protection Program):
The CARES ACT provides for a potentially forgivable loan of up to $10,000,000 for
qualifying businesses. A qualifying business is generally a business that has less
than 500 employees, subject to standard affiliated business restrictions (I.E. if one
person owns 5 businesses, each with 200 employees, they won’t qualify for this as
the total headcount for the affiliated businesses is over 500). Any business
applying for the loan is presumed to have been impacted by COVID, so the relevant
metric here is whether a business has 500 employees or less. Important note for
food & beverage / hospitality businesses – this rule does not apply. This is great
relief for many restaurateurs with multiple locations.
Furthermore – the 500-employee rule appears to be relevant to the current
headcount of a particular business. I.E. a hospitality business which tends to have
significant turnover relative to other industries and issued 501 W-2’s for 2019 as a
result is not disqualified so long as they are currently employing less than 500
people.
The loan size is calculated by taking the business’ average monthly payroll costs
(subject to adjustment as defined below) for the 12 month period prior to the date
on which the loan is made, multiplied by 2.5. A business that started after June 30,
2019 would take their average payroll from January 1, 2020 through February 29, “Payroll Costs” are defined as Salary, Wage, Commission, Bonus Cash Tips, Sick
Leave, Vacation, Group Health, Vision, Dental Insurance premiums, retirement
contributions, and state payroll taxes. Furthermore, this also includes payments to
self-employed persons and independent contractors. This also appears to include
officer’s compensation (but not profit distributions). The amount of compensation
/ contractor payments usable for the 12-month period is $100,000 for that same
12-month period. So, if an employee made $250,000 for that 12-month period,
only $100,000 of their compensation package is able to be utilized for the loan
sizing calculation.
As the question has been asked to us already, “independent contractors” from our
standpoint does not include payments to other businesses, unless the other
business is strictly a sole proprietor / independent contractor (I.E. not employing
other persons). The verification guidelines contained in the text of the CARES ACT
appear to indicate that such payments would need to be evidenced by 1099-MISC
forms to qualify (the guidance is not specific on this as of today). As such, now is
also a good time to ensure that your business issued all required 1099-MISC forms
for 2019.
Example #1:
A restaurant’s average payroll cost (including insurance, retirement, etc. as listed
above) for the 12 months prior to loan issuance was $1,200,000, or a total of
$100,000 per month. The total forgivable loan that the restaurant qualifies for is
$250,000.
Example #2:
A Management Consulting Agency has an average payroll cost for the 12 months
prior to loan issuance was $300,000. Further, the consulting agency paid
freelancers $600,000 for the 12 months prior to loan issuance. The total eligible
12-month cost is $900,000 here, or $75,000 a month. Total forgivable loan is
$187,500.
The loan may be used for the following: Payroll Costs (defined above); payments of
interest on any mortgage obligation (not principal payments); rent; utilities; and
interest on any other debt obligations that were incurred before the covered
period.
The loans have a maximum maturity of 10 years, and interest rates for any portion
of the loan that is not forgiven (see below) cannot exceed 4%. Lenders are required
to give borrowers a complete payment deferral on all principal, interest and fees of
not less than 6 months and not more than 1 year on all loans under this Act. The loan is forgiven subject to the following calculation:
The ratio of the average number of full-time equivalent employees during the
Covered Period (defined as 8 weeks following the receipt of the loan) compared
with the average number of FTE’s from 2/15/19-6/30/19 or average number of
FTE’s from 1/1/20-2/29/20.
Example – Digital Media Agency has 70 FTE’s from 2/15/19-6/30/19 and 90 FTE’s
from 1/1/20-2/29/20; Digital Media Agency has 75 FTE’s during the Covered
Period.
The Agency would presumably use the 2/15/19-6/30/19 period for the
calculation. Since 75 FTE / 70 FTE is greater than 100%, the loan is completely
forgiven.
If Agency had used the 1/1/20-2/29/20 period, 75 FTE / 90 FTE is equal to
83.33%, so 83.33% of the loan is forgiven.
Mechanics of the Loan:
Treasury has ordered the loans to be administered through SBA participating
banks. The mechanics should work something like this:
Taxpayer puts application in to Chase Bank, for example. Chase Bank releases the
money (should be within 1 week according to various public sources, we are
thinking the money requested under such an application will realistically
be released by end of April). Chase Bank collects certification information from
taxpayer in order for Chase Bank to get repaid from US Government and in order to
properly report the forgivable loan portion.
We advise you all to reach out to to us and we can assist in facilitating/steering the
loan process to the required lender. The US Government will be releasing a list of
preferred SBA lenders to handle to process. We can assist you in the navigation of
this process to make sure that the most help that is available to you from the
CARES ACT is realized.
Self Employed/Sch C Filers
Self-employed persons are eligible here as well, which is great news for freelancers
& sole proprietors. The calculation appears to rely on 2019 reported Schedule C
income. For example, if a freelancer reported $60,000 of net profit on a Schedule C,
the total loan size appears to be 2.5X the average monthly net profit ($5,000
average monthly profit based on $60,000 of 2019 net profit) for a total of
$12,500. For freelancers who may be organized as S-Corporations, the loan size
should be based on Payroll Costs (as defined above). Based on our reading of the CARES ACT, there a potential windfall baked into
here with respect to the tax implications of the forgiveness of the PPP loan.
Treasury may issue a clarification or our perspective on this point might be
misguided, but to our eye, the CARES ACT provides that any loan forgiveness is not
taxable. Meanwhile, the monies used from the PPP loan to fund Payroll Costs and
other covered costs would be tax deductible. So, our interpretation of this is that a
participating business will receive a PPP loan, use the PPP loan funds in
conjunction with the requirements of the CARES ACT, take a tax deduction for any
such costs spent from the PPP loan, and then not have to report as income the PPP
loan if it converts to a grant.
Example:
Business qualifies for $150,000 PPP Loan.
Business spends $150,000 of PPP Loan on Covered Costs and qualifies for loan
forgiveness of $150,000.
Loan forgiveness of $150,000 is not taxable.
Business deducts $150,000 in Covered Costs on 2020 tax returns. Business reports
$0 income from the PPP Loan (now a grant). Business has a $150,000 additional
tax deduction on 2020 tax returns.
Important information contd.
SBA EMERGENCY // DISASTER LOANS:
There is also an Emergency Loan available to affected businesses of up to
$2,000,000 with extremely favorable repayment terms (30-year money at
3.75%). With that said, Emergency & Disaster Loans must be repaid, although the
actual amount of the loan may be significantly higher than the forgivable loan
under the Paycheck Protection Program (“PPP”) given that the loan sizing is based
at least partially on lost revenue, whereas loan signing under PPP is based on
Payroll Costs.
There’s been information circulating that a business has to choose either PPP or
the SBA Emergency Loan. Pursuant to Section 1102(Q) of the CARES ACT, a
business can’t finance Payroll Costs / Rent / Utilities / Loan payments via an
Emergency Loan if they also participate in PPP. However, if the business is using
the SBA Emergency loan to pay vendors, for example, it appears that a business
would qualify to pull from both tranches. We expect additional guidance from
Treasury / Senate Finance Committee on this topic.
You can apply for the Disaster Loan here:
https://www.sba.gov/funding-programs/disaster-assistance
EMPLOYEE RETENTION TAX CREDIT:
The CARES ACT provides another option for employers in lieu of a Paycheck
Protection Loan. The Employee Retention Tax Credit provides that an employer
may opt instead for a 1-year tax credit against the employer’s 6.2% share of Social
Security Payroll Taxes paid on each employee’s “qualified wages” up to maximum
of $10,000 per employee.
To qualify for the tax credit, a business must continue to have paid its employees
while:
a. its operations were fully or partially suspended during 2020, due to orders
from a governmental authority on account of the COVID-19 crisis; or
b. its operations remained open, but the business’ gross receipts for that
quarter were less than 50% of what they were for the same quarter in
2019. In this case, the business will be entitled to a credit until it has a quarter
in which its gross receipts exceed 80% of what they were for the same
quarter in the prior year.
The credit is equal to 50% of the “qualified wages” paid to each employee for that
quarter. A business’ “qualified wages” depends on its size.
I. When a business is under 100 employees, qualified wages include wages paid
to employees during the quarters in which the business is shut down and
wages paid during each quarter in which the business has suffered a sharp
decline as described in (b) above.
II. For businesses with more than 100 employees qualified wages means only
those wages paid to employees during a shutdown.
Health care expenses allocable to wages like group health care plan costs count
towards qualified wages.
This credit is yet another option for affected businesses, although the qualification rules are more stringent than the Paycheck Protection Loans, and will likely result
in a lower amount of money for affected businesses. The application of the credit
towards future payroll taxes should be handled by payroll providers, but we need
to await instruction on the mechanics of same from payroll providers. It is our
opinion that the PPP will provide more significant relief to small businesses. An
eligible business can only choose PPP or this Employee Retention Tax Credit.
INDIVIDUALS // FREELANCERS // UNEMPLOYMENT BENEFITS // STIMULUS
FUNDS
The CARES ACT provides significant benefits and protections to individuals,
including particular freelancers and sole proprietors who have lost work.
Unemployment provisions have been vastly expanded to cover a much wider range
of persons. Of particular note is that self-employed persons will qualify for
unemployment benefits, an unprecedented change in unemployment law that
should provide significant relief to those participating in the “Gig Economy”. The
self-employed definition also appears to include officers of S-Corporations /
partners in LLC’s who received compensation through their businesses prior to
COVID induced shutdowns.
Federal Stimulus Additional Information
Unemployment
Payouts will be enhanced by an additional $600 per week for the four-month
period from March 1, 2020 through June 30, 2020, in addition to the normal
unemployment payout that an affected person would receive under applicable
state law. A key point in the final version of the bill – those on paid sick leave are
not eligible. Since New York expanded their paid sick leave definition to allow
individuals to collect who were losing their jobs on account of business shutdowns
ordered in NYC and the Boroughs, many individuals participated in sick leave.
We would actually recommend those same individuals shifting gears to collect
unemployment to the extent they haven't done so already.
Freelancers and sole proprietors who collect under this proviso would receive the
average state unemployment payout, plus the additional $600 per week of Federal
unemployment assistance mentioned above. Note that if freelancers or self-
employed individuals, regardless of form of business organization (S-Corp, LLC,
C-Corp), apply for the PPP discussed at length above, you must immediately
cancel your UI upon receiving the PPP funds or risk a claw back of UI monies
from the applicable State Unemployment Agency. Stimulus payments (Recovery Rebate Credit (“RRC”))
These will be provided to many families in the amount of $1,200 per person
($2,400 per married couple) and $500 per qualifying child, subject to a reduction
based on 2019 household income limits. If an individual has not filed a 2019 tax
return, the RRC will be based on 2018 household income. The stimulus is reduced
and phases out based on the following limits and filing status:
Individual // Married Separate - $75,000 with a complete phaseout at $99,000
Heads of Household - $112,500 with a complete phaseout at $136,500
Married Joint - $150,000 with a complete phaseout at $198,000
An important note is that the RRC is an advance on a 2020 tax credit which will
need to be reconciled on your 2020 individual tax return. The question has arisen
regarding individuals wishing to refrain from filing a 2019 tax return due to 2019’s
income being above the phaseout threshold for the RRC payment while 2018’s
income was below the phaseout threshold. While this appears to be an effective
strategy to get an immediate payout of the RRC, taxpayers in that position will most
likely need to repay the RRC when they file their 2020 individual tax return.
The CARES ACT also modifies the rules on net operating loss carrybacks. Under the
overhaul to the tax code effective in 2018, net operating loss carrybacks were
prohibited (except in very limited circumstances). This provision has now been
eliminated. Taxpayers with net operating losses in 2018 and 2019 may want to
take advantage of this provision to request a refund of federal taxes paid for up to 5
years prior to 2018 // 2019.
We hope this information finds you all safe. WE ARE ALL IN THIS TOGETHER, AND
TOGETHER WE WILL GET THROUGH IT.
We are here to help you, as always please call or email.
Overall – we trust the above has been informative. We are here to help so please
reach out to us if questions arise on the above. With respect to PPP loans
specifically, we are consulting with our clients on the application process and are here to support // liaise with your banks if needed.
May God Bless us all and God Bless America.