Freeman Law continues to provide Coronavirus-relief guidance. For comprehensive guidance, check out our firm compendium on Coronavirus-relief guidance.
H.R. 748: Coronavirus Aid and Economic Security Act (“CARES Act”) Background. On March 27, 2020, President Trump signed into law H.R. 748, the Coronavirus Aid and Economic Security Act or the CARES Act, following a unanimous 96-0 vote in the U.S. senate and a voice-vote of approval in the House of Representatives. The $2 trillion coronavirus-relief legislation provides financial assistance to small businesses and taxpayers through a host of mechanisms, including through newly-established “advanced recovery rebates” and programs designed to encourage employee retention during the coronavirus epidemic. The Act relaxes the ability to withdraw funds and loans from certain qualified retirement plans without adverse tax consequences and establishes favorable small business loan programs, tax credits, and a number of amendments to the Internal Revenue Code of 1986, as amended (the “I.R.C.”). In addition, the economic stimulus Act retroactively amends several provisions of the Tax Cuts & Jobs Act of 2017 (the “TCJA”), including certain restrictions on net operating losses and carrybacks, excess-loss deductions, business-interest deductions, and bonus depreciation rules relating to qualified improvement property, among other changes.
Paycheck Protection Program SBA Loans (“PPP Loans”)
Summary. The CARES Act creates the Paycheck Protection Program (“PPP”), a new loan program to be administered through the U.S. Small Business Administration (“SBA”), and authorizes commitments for general business loans of up to $349 billion to be guaranteed by the SBA. The PPP is designed to provide loans of up to $10 million to qualifying small businesses in order to encourage employee retention during the coronavirus crisis by providing financial assistance with the payment of certain operational costs. If applicable requirements are met, part or all of the amount of the loan may be forgiven without giving rise to cancellation-of-indebtedness income for federal tax purposes.
Eligibility. Generally, businesses (including nonprofits) qualify if they have 500 or fewer employees, provided that the loans are made between February 15, 2020, through June 30, 2020. For these purposes, an employee means an individual employed on a full-time, part time, or other basis. More specifically, in addition to small business concerns, any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act is eligible to receive a covered loan if the business concern, nonprofit organization, veterans organization, or Tribal business concern employees not more than the greater of (i) 500 employees or (ii) if applicable, the size standard for number of employees established by the SBA for the applicable industry in which the entity or organization operates.
- Sole Proprietors, Independent Contractors and Eligible Self-Employed Individuals. The CARES Act specifically provides that individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals are eligible to receive a covered loan. Such persons may be required to submit documentation in order to establish eligibility, including payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship, as determined by the SBA.
- Special Rules for Hospitality and Dining Industry. The CARES Act provides for a special exception targeted to the hospitality and dining industry—an industry sector that is expected to suffer particular economic challenges during the crisis. Under this special exception, a business concern that is designated under Sector 72 of the North American Industry Classification System (NAICS) and employs not more than 500employees per physical location is eligible for a covered loan under the PPP.
Maximum Loan Amount. Generally, the maximum loan amount is limited to the lesser of (i) the average total monthly payments by the applicant for payroll costs incurred during the 1- year period prior to the date on which the loan is made, multiplied by 2.5, or (ii) $10 million. However, if the applicant was not in business during the period beginning on February 15, 2019, and ending on June 30, 2019, the maximum loan amount is limited to the lesser of (i) the average total monthly payments by the applicant for payroll costs incurred during the period beginning on January 1, 2020, and ending February 29, 2020, multiplied by 2.5, or (ii) $10 million.
- For these purposes, “payroll costs” are generally defined as any compensation paid to an employee (salary, wages, commissions); payment for vacation; parental, family, medical, or sick leave; allowances for dismissal or separation; payments for group health care plans; retirement benefits; and State or local taxes assessed on the employee’s compensation. In addition, payroll costs include the payment of any compensation or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation not in excess of $100,000.
- Payroll costs do not include any compensation of employees in excess of $100,000; any compensation to employees whose principal residence are outside the United States; and any compensation for qualified sick leave or qualified family leave wages under the Families First Coronavirus Response Act.
Allowable Uses. The recipient may use the loan proceeds to pay: (1) payroll costs; (2) costs related to the continuation of group health care benefits; (3) employee salaries, commissions, or similar compensations; (4) interest on mortgage obligations; (5) rent; (6) utilities; and (7) interest on debt obligations incurred prior to February 15, 2020.
Non-recourse. Generally, the loans will be non-recourse including against any individual shareholder, member, or partner if the loan is not repaid, provided such person uses the loan proceeds for purposes authorized under the Act.
No Personal Guarantee or Collateral. No personal guarantee is required for the loan nor is any collateral required.
Interest Rate. The interest rate cannot exceed 4%.
Payment Deferral. Generally, any payment (principal, interest, and fees) is deferred for “impacted borrowers” with PPP Loans for a period of not less than 6 months and not more than 1 year. For these purposes, “impacted borrowers” means a PPP Loan recipient that was in operation as of February 15, 2020, and has an application approved or pending approval on or after March 27, 2020.
No Prepayment Penalty. There is no prepayment penalty for any payment.
SBA Fee Waiver. The SBA will not charge a fee on a PPP Loan during the covered period.
Waiver of Requirement of Inability to Obtain Credit Elsewhere. During the covered period, the requirement that a small business concern be unable to obtain credit elsewhere is waived with respect to a covered loan under the PPP.
Certification. A borrower under the PPP must make a good-faith certification that:
- That uncertainty of current economic conditions makes necessary the loan request to support ongoing business operations;
- Acknowledging that funds will be used to retain workers and maintain payroll or make mortgage, lease, or utility payments;
- That there are no other duplicative loan applications; and
- During the period from February 15, 2020, through December 31, 2020, the borrower has not received other loan amounts under the Act.
Forgiveness of Loan Amounts. A loan amount may be forgiven in an amount equal to the sum of the following costs incurred and payments made in the “covered period,” which is the 8-week period beginning on the date of the origination of a covered loan (collectively, “Eligible Costs”):
- Payroll costs;
- For these purposes, “payroll costs” are generally defined as any compensation paid to an employee (salary, wages, commissions), payment for vacation, parental, family, medical, or sick leave, allowances for dismissal or separation, payments for group health care plans, retirement benefits, and State or local taxes assessed on the employee’s compensation. In addition, payroll costs include the payment of any compensation or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation not in excess of $100,000.
- Payroll costs do not include any compensation of employees in excess of $100,000; any compensation to employees whose principal residence is outside the United States; and any compensation for qualified sick leave or qualified family leave wages under the Families First Coronavirus Response Act.
- Any payment of interest on a covered mortgage obligation;
- A “covered mortgage obligation” is defined as any debt or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020.
- Any payment on a covered rent obligation;
- A “covered rent obligation” is defined as rent obligated under a leasing agreement in force before February 15, 2020.
- Any covered utility payment;
- A “covered utility payment” is defined as payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Documentation Required. Note that the CARES Act specifically prohibits forgiveness of loan amounts without submission of required documentation to the lender that is servicing the covered loan. The required documentation for loan forgiveness treatment is as follows:
- documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods at issue, including:
- payroll tax filings reported to the Internal Revenue Service; and
- State income, payroll, and unemployment insurance filings;
- documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
- a certification from a representative of the eligible recipient authorized to make such certifications that—
- the documentation presented is true and correct; and
- the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
- any other documentation the SBA determines to be necessary.
- Principal Amount Limitation. The amount of the loan forgiveness cannot exceed the principal amount of the financing available under the loan.
- Reduction in Number of Employees. The amount of the loan forgiveness is reduced by multiplying the Eligible Costs by (1) the average number of full-time equivalent employees per month employed by the recipient during the 8-week period beginning on the date of the origination of the loan, over (2) at the election of the borrower, either (i) the average number of full-time equivalent employees per month employed by the borrower during the period February 15, 2019, and ending June 30, 2019, or (ii) the average number of full-time equivalent employees per month employed by the borrower during the period beginning on January 1, 2020, and ending February 29, 2020.
- Computation of Full-Time Equivalent Employees. Generally, the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month. § Reduction for Reduced Salary and Wages. The amount of the loan forgiveness is reduced by the amount of any reduction in total salary or wages for an employee that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed prior to the origination of the loan. For these purposes, employees who had compensation in excess of $100,000 are generally exempt from this requirement.
Application for Loan Forgiveness
- Requirements. A borrower seeking loan forgiveness must submit to the lender servicing the loan an application, including: (1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for theapplicable pay periods (e.g., IRS payroll tax filings and state tax filings); (2) documentation to show payments were made on covered mortgage obligations, covered lease obligations, and covered utility payments; (3) certification from borrower or representative that the documentation is true and correct and that amount of loan forgiveness was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and (4) any other documentation the SBA may require.
- 60-Day Decision. The lender who receives the application for loan forgiveness must issue a decision on the loan forgiveness application within 60 days.
Non-Taxability of Loan Forgiveness. While the forgiveness or cancellation of indebtedness is generally taxable under the I.R.C., the Act specifically provides that such amounts forgiven with respect to an amount equal to the sum of the costs described above are excluded from gross income.
Authorized Lenders. Lenders that are authorized to extend loans under the SBA’s already-existing section 7(a) loan program are eligible to make loans under the SBA’s new PPP. The Act provides the SBA and Secretary of the Treasury with authority to extend authorization to make loans under the PPP to additional lenders who are determined to have the necessary qualifications to process, close, disburse and service loans made with the guarantee of the SBA.
For more resources, see:
- Force Majeure and Coronavirus: “Act of God” or Breach of Contract?
- U.S. Department of Labor Issues Guidance on Families First Coronavirus Response Act
- Additional IRS Guidance on Coronavirus Tax Relief: New People First Initiative
- TEXAS COMPTROLLER OFFERS ASSISTANCE TO TEXAS BUSINESSES DURING THE CORONAVIRUS OUTBREAK
- Latest IRS Coronavirus Guidance on Deadlines
- Speedy Trial Rights and the Coronavirus
- Families First Coronavirus Response Act
- The CARES Act’s Impact on the Tax Code’s Business Interest Deductions
- A Fresh Start for Many? Economic Downturn Means an Upturn in Favorable Tax Settlements
Representation in Tax Audits & Appeals
Need assistance in managing the audit process? Freeman Law’s team of attorneys and dual-credentialed attorney-CPAs regularly represents taxpayers before the IRS and Texas Comptroller. Our team also provides tax return-related representations and helps taxpayers navigate state tax laws. Our Firm offers value-driven services and provides practical solutions to complex issues. Schedule a consultation or call (214) 984-3000 to discuss our tax representation services.