Monumentous $2.2 Trillion CARES Act Demystified:

Worried about how to steer your small business out of the COVID-19 crisis? One of the savviest moves a small business owner can make right away is be among the first to leverage the Coronavirus Act, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748) that President Trump signed into law on Friday, 27^th, 2020 March. Acting now could make the crucial difference to your company’s financial health and well-being (not to mention, your own stress levels).

We get that. That is why our team has worked round-the-clock this past weekend and put together a user’s manual to understanding and taking full advantage of the opportunities afforded by the CARES Act. Read on to see how you can create strategies for both your business and employees to deal with the current crisis.

If you are weird like us and want to read the full text, here is a link to the full and final text on Congress.gov

TITLE I – KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT

This Title is focused primarily on getting funds to small businesses quickly and efficiently in order to allow you to continue to employ your team and not to lay off more people. This Title has a number of sections within it but we will focus on the three most important sections that should matter to you and your business:

• Section 1102 – Paycheck Protection Program
• Section 1106 – Loan Forgiveness
• Section 1110 – Emergency EIDL Grants

Section 1102 – Paycheck Protection Program

In this section, the CARES Act attempts to provide loans to businesses to ensure they can continue to pay salaries for employees who are unable to work due to locally mandated quarantines. In general, this Act created a subset of loans covering the period from February 15, 2020 through June 30, 2020, called covered loans. These loans have a defined maximum amount. This maximum is the lesser of a multiple of payroll costs as outlined below or $10,000,000. To allow almost any COVID-19 affected company to be able to obtain a covered loan under the CARES Act guidance, the bill lifts many barriers to entry. It also expands the definition of “eligible businesses”. Thanks to this new provision, many Self-Employed individuals, Sole Proprietors, and Independent Contractors are eligible to obtain federally covered loans.

These loans are still administered by private banking institutions; however, now, the Federal Government is backing your business loan. This encourages lenders to provide critical funds to borrowers who traditionally were considered risky because of unpredictable cash flow. The Act instructs lenders to look at a business with the following criteria: 1) if the business was in operation on or as of February 15, 2020. 2) had employees that they paid salaries to 3) paid independent contractors.

Keep in mind that these covered loans can only be used for a very narrow list of business expenses:

1. Payroll Costs (defined below)
2. Costs related to the continuation of group health care benefits
3. Employee Salaries, Commissions or similar compensation
4. Payments of interest on any mortgage obligation (NO Prepayments allowed)
5. Rent
6. Utilities
7. Interest on any other debt obligation incurred prior to the covered period

Let us summarize how the bill defines Payroll Costs as this will establish the maximum loan amount.

Payroll Costs

Payroll Costs as defined by the CARES Act are to include the following:

For Employers:

• Salary, wage, commission, or similar compensation
• Payment of cash tips or equivalent
• Payment for vacation, parental, family, medical or sick leave
• Allowances for dismissal or separation
• Payments required for the provisions of group health care benefits, including insurance premiums
• Payment of any retirement benefit
• Payment of state or local tax assessed on the compensation of the employee

For Sole Proprietors, Independent Contractors, and Self-Employed Individuals:

• The sum of payments of any compensation
• Income of a sole proprietor or independent contractor that is a:
  • Wage
  • Commission
  • Income
  • Net earnings from self-employment
  • Similar compensation
• Must be no more than $100,000 in one year as pro-rated for the covered period

The CARES Act then has some excluded costs as well:

• Compensation of an individual employee in excess of an annual salary of $100,000 as prorated for the period of February 15, 2020 through June 30, 2020
• Payroll Taxes, railroad retirement taxes, and income taxes
• Any Compensation of an employee whose principal place of residence is outside the United States
• Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act
• Qualified Family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act

Once you calculate this total Payroll Cost (Included Payroll Costs – Excluded Payroll Costs = Payroll Costs) you can determine your maximum loan.

Loan Amount Calculation:

The loan amount is 2.5 times one of the following:

• Average total monthly payroll costs (as defined above) incurred during the year prior to the loan date (2019)
• For businesses not operational in 2019, the Average total monthly payroll costs (as defined above) incurred for January and February 2020

Up to a maximum of $10,000,000.

Section 1106 – Loan Forgiveness

The next section we will take a look at is one that is extremely important for any small business affected by COVID-19. This section allows for the forgiveness of a covered loan obtained under section 1102 above. Your company may qualify for forgiveness of the loan amounts used during the 8 weeks after the origination of the loan if you spend the funds on the following:

• Payroll Costs (as defined above)
• Interest on the mortgage obligation incurred in the ordinary course of business
• Rent
• Utilities
• If you have tipped employees – additional wages paid to those employees

Although, eligible for forgiveness, the full amount of the loan might not be forgiven. The amount forgiven may be reduced if there is a reduction of the total number of employees or a reduction greater than 25% in wages paid to employees. However, any reduction of employees or salaries that occur between February 15, 2020 and 30 days after the CARES Act passed will not reduce the forgiveness amount if brought back before June 30, 2020.

In other words, if you lay off employees or lower their salaries after obtaining a loan you may still have to pay some of it back. However, any layoffs or salary adjustments from February 15, 2020 to April 26 will not affect the forgiven amount.

Section 1110 – Emergency EIDL Grants

The main purpose of this section of the Act was to help small businesses to get the funds they desperately need as quickly as possible. Affected and eligible companies can apply for an advance of funds up to $10,000 for sick leave, maintaining payroll, rent, debt obligations that the administrator must respond to within 3 days. This section waived many of the traditional requirements when applying for any loan such as personal guarantee, tax documents, or financial statements from needing to be provided. In short, this section defined that loans should be based solely on credit score or alternate means as defined by the bank to ensure the ability to pay back.

TITLE II – ASSISTANCE FOR AMERICAN WORKERS, FAMILIES, AND BUSINESSES

Title II focuses mainly on employees and will allow you to address their most pressing concerns as well as guide them through a difficult time. However, this Title includes some key benefits for employers as well, specifically sections 2301 and 2302. In this Title, we see many items that help those people who were laid off, unable to work, and/or are self-employed. We will focus on a few sections as follows:

• Section 2102 – Pandemic Unemployment Assistance

• Section 2104 – Emergency Increase in Unemployment Compensation Benefits

• Section 2201 – 2020 Recovery Rebates for Individuals

• Section 2301 – Employee Retention Credit for Employers Subject to Closure Due to COVID-19

• Section 2302 – Delay of Payment of Employer Payroll Taxes

Section 2102 – Pandemic Unemployment Assistance

This section of the CARES Act was the government’s attempt to provide assistance to those workers who were laid off, sick or otherwise unable to work due to the COVID-19 Pandemic. Perhaps the most important part of this section is who is eligible to apply for unemployment benefits. The section calls for the individual to self-certify that they are able to and available for work. The individual must also be unemployed, partially unemployed, or unable or unavailable to work because:

• They are diagnosed with or experiencing symptoms of COVID-19
• A Member of their household has been diagnosed with COVID-19
• They are providing care for a family member or member of their household diagnosed with COVID-19
• A child or other person they are a caregiver to is unable to attend a school or another facility that is closed as a direct result of COVID-19
• Unable to reach the place of employment due to a quarantine imposed due to a COVID-19 public health emergency
• Unable to reach the place of employment due to a health care provider advising them to self-quarantine due to COVID-19 concerns
• The individual has become the primary breadwinner of a household due to the head of household dying as a direct result of COVID-19
• The individual has quit their job as a direct result of COVID-19
• The individual’s place of employment is closed as a direct result of the COVID-19 public health emergency

The most notable part of the Act was the inclusion of self-employed individuals who are seeking part-time employment or those who do not have sufficient work history, and otherwise would not qualify for regular unemployment or extended benefits.

However, this section excludes individuals who can work remotely and still be paid or an individual who is receiving paid sick leave or other paid leave benefits.

Section 2105 also waived the 7-day waiting period for unemployment benefits.

Section 2104 – Emergency increase in unemployment compensation benefits

This section dictates that individuals enrolling in unemployment will receive an additional $600 defined as Federal Pandemic Unemployment Compensation. This amount is above and beyond the traditional state calculated unemployment compensation.

Section 2201 – 2020 Recovery rebates for individuals

This section discusses the “Direct Checks” the news is talking about. First and foremost, let us make it clear that these are tax credits you get when filing your tax return. Depending on your tax situation, you may qualify for a refund and only then will you get the actual “check” from the IRS. The mentioned tax credit for an individual is going to be $1,200. For couples filing a joint return, the credit will be $2,400. All filers will get and additional $500 for each qualifying child. This credit will  be viewed as an overpayment on your last filed tax return and will be available for a refund. The IRS will be processing these as quickly as they can and will issue a refund via either check or direct deposit depending on how you filed your last tax return. However, as with many such credits, gross income limitations apply. The credit will be reduced by 5% of gross income that exceeds the following thresholds:

• $150,000 for a joint return
• $112,500 for a head of household return
• $75,000 for all other filers

This credit is intended for the 2020 return; however, it will be treated as a refund on your 2019 return. If one has not yet been filed, the 2018 return will be used instead.

Our gut feeling is there will be a form to be completed on the 2020 income tax returns to assess if the taxpayer qualified in the current year and if they did not, they would need to repay the credit.

Section 2301 – Employee Retention credit for employers subject to closure due to COVID-19

This section allows employers to receive a 50% tax credit against applicable employment taxes each quarter of qualified wages paid to each employee. The wages cannot exceed $10,000 per quarter per employee. Any excess credit above what was actually paid in will be treated as a refundable credit to the employer. The businesses’ gross receipts must be less than 50% of the gross receipts for the same quarter the prior year to start using the credit. The credit can be claimed until the gross receipts have increased to 80% of the same quarter of the previous year.

Section 2302 – Delay of payment of employer payroll taxes

This section was intended to allow employers to keep more cash in their business now and to extend the deadline of paying these taxes to the IRS. Employer and employee portion of the employment taxes do not need to be paid to the government for the period from when the Act was passed through December 31, 2020. However, these taxes must be paid in over the next two years at 50% per year. In short, 50% of the deferred taxes must be paid in by December 31, 2021 and the balance by December 31, 2022.

One exception, however, is if you are having loans forgiven that were used to pay wages, then the related employment taxes cannot be deferred and must be paid on-time.

Other Items Worth Mentioning:

The CARES Act addresses many different areas of the economy, workers, and business operations. What we covered here are just a few of the key areas we at Fringe feel may be beneficial to your company and employees. Some other notable areas in the Act are:

• Net Operating Losses can be carried back up to 5 years to fully reduce income instead of only 80%
• Businesses can deduct 50% of business interest instead of 30%
• The 10% early withdrawal penalty for distributions up to $100,000 from retirement funds has been waived for affected individuals
• A correction of an oversight of the Tax Cuts and Jobs Act allowing Qualified Improvement property to be immediately expensed instead of spreading it over 39 years
• The allowance of the corporate credits to be claimed immediately
• Tax-free employer repayment of employee student loans is allowed up to $5,250

Altogether, this Act was designed to help millions of Americans affected by COVID-19. If you or your business are affected and would like to talk and get professional guidance, schedule a call with us today.

If anyone you know can benefit from this information or our advice, please feel free to share and forward this to them.