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The Thomas Howell Ferguson Blog

CARES Act – Things You Need To Know – Get The Facts

Payment Protection Program (PPP) – This is a program that was included in the CARES Act and was enacted into law on March 27, 2020.  This is an 800+ page bill.  Here are a few fast facts to highlight things you need to know now, especially if you decide it makes the most sense for you and your business to pursue an application with the Paycheck Protection Program (PPP):

Small Business Updates

  • For small businesses, which is for purposes of the CARES Act, they are defined as less than 500 employees for the Paycheck Protection Program (PPP).
  • For sole proprietors, you can submit loan applications under the PPP program beginning April 3, 2020.
  • Be sure to reach out to your CPA, legal counsel, or banker to see if it makes sense for you and your business.
  • The PPP is intended to get dollars out to businesses fast in order to allow them to continue to make payroll, pay rent, pay utility bills, and cover other specified expenses with those loan dollars.
  • The PPP loan itself is being administered through the banking system. The SBA is providing the dollars from the federal government to the banks, and the loan applications are made directly with the banking institution. Therefore, you need to talk to your bank to get the loan application, to be able to complete that process, and get your loan in the queue if you want to pursue a PPP loan.
  • The PPP loan is expected to be very highly sought after. No one knows at this stage how the funding exactly will roll out, how the loan applications will be prioritized, so we are asking our clients to stay very close with their bankers to be able to work through that process to put them in the best chance possible to be able to get a loan through the program.
  • In anticipation of making a loan under that program, one of the things you need to be working on as an organization is aggregating your wage data. The Payment Protection Program (PPP) loan, the max amount of loan that you can apply for is based upon your payroll.  It is based upon the calendar year payroll, so your W2s and your 941 forms will be great sources of information to be able to make that calculation.  The maximum loan is the lesser of $10 million or 2.5 times your monthly average payroll costs.
  • The most popular aspect of that program by far is not the loan itself but the ability to have a substantial part of that loan forgiven on a tax-free basis if you meet certain criteria.
    • Maintaining your headcount and your payroll and not reducing your wages beyond 25% over the succeeding eight weeks from which the loan originates.
    • If you meet these criteria, the loan effectively converts to a grant, and you are not required to pay that back.
    • Any amounts of that loan that are not forgiven or move to grant status must be paid back over a two-year period at a 0.5% interest rate.
      • When the law was rolled out, the payback provisions were over a 10-year period at 4% interest rate. The guidance released as of March 31, 2020, by the Treasury Department of the SBA was a 0.5% payback over a two-year period.
    • Everyone is focused from a business standpoint on the fact that the loan can be forgiven. It is extremely important that everyone be aware that as a business, this is a loan. You are taking out a loan. It is not a grant immediately upfront. There are key requirements that you will have to maintain in order to achieve forgiveness status. You will apply back to the bank with documentation to be able to substantiate the amount of loan that you are requesting to be forgiven. Again, we encourage you to work with your financial professionals to be able to put yourself in the best position possible to be able to document the forgiveness component, because there are some best practices in that area that you can institute now as you are leading up to the loan process.

Not-for-Profit Updates

  • The only non-for-profit organizations that are eligible for the Paycheck Protection Program (PPP) are 501(c)(3) and 501(c)(19). All other 501(c) organizations are not eligible for the PPP.
  • Part of the CARES Act included a $300 above-the-line charitable contribution for filers that take the standard deduction. This does not include non-cash gifts, or gifts from donor advised funds, but those are for cash contributions.
    • For cash contributions you do have a new above-the-line deduction.
  • Charitable contributions for itemizers were also expanded. The usual limit for 2020 would have been 50 percent or 60 percent for cash, and that was expanded to 100%. It also increased the existing cap for corporate donors on cash and corporate donations.

Individuals, Payroll, and Retirement Plans

  • Income tax changes:
    • A significant item is the change in Net Operating Losses (NOLs). There are still a lot of questions that we have related to implementation, but we do know that for NOLs arising in tax years beginning before 2021, the CARES Act allows you to carry back 100% of NOLs to the prior 5 years.
    • The Act also temporarily liberalizes the treatment of these NOL carry forwards for tax years beginning before 2021. You can take the NOL deduction equal to a 100% of taxable income.
  • You’ll recall, that the recent tax changes limited the NOL to 80% of taxable income and that a lot of companies out there were eliminated from being able to go back and carry back. This basically reverses these elements, and then adds a new benefit of 5 years.
  • For those dealing with AMT, the Act allows corporations to go ahead and claim 100% of the AMT credits.
  • For those of you that saw the last couple of years that you are being limited in your deductibility of interest, there is an increase now in the interest limitation to 50% of adjusted taxable income for 2019 and 2020. If you will recall before it was limited to 30%.
  • The other change that we have been waiting for quite a while, the CARES Act also made a technical correction to the 2017 tax law that retroactively treats various building improvements, including your leasehold improvements, restaurant improvements, and retail improvements are now immediately deductible. If you had to capitalize some of these improvements because of the error in the tax law, then this will be a nice deduction for you this year.
  • Payroll Taxes
    • For all entities, you may be able to defer paying the employer portion of certain payroll taxes through the end of 2020 with all of the 2020 deferred amounts due and equal parts, one at the end of 2021, and the other at the end of 2022. You can defer a 6.2 percent employer portion of the Social Security payroll tax.
      • It is important to note that this will not be available if you take advantage of the debt forgiveness under the PPP.
    • Retirement plans
      • The CARES Act also made changes that impact some of these plans. If you are a plan sponsor, your participants will probably be asking you about it.
      • There is a whole new distribution category that you can add to existing plans. You can permit in surface COVID-19 related distributions from participants vested account balance without regard to your normal withdrawal restrictions.
        • This will need to be done during the 2020 calendar year, and it must be to an eligible individual:
          • If you have an individual participant that has been diagnosed with COVID-19
          • Have a spouse or dependent that has been diagnosed with COVID-19
          • Or has experienced adverse financial consequences
            • Defined broadly
            • Result of a quarantine, furlough, layoff, reduction of business hours, closure, even if you have lack of childcare.
          • There are a lot of factors that are going to allow this new distribution category given our current situation.
        • As a plan administrator, you can rely on your participants’ certification of the above eligibility. There isn’t anything you need to do to prove that.
      • What are these distributions going to look like?
        • Limited to $100,000
        • Will not be subject to the 20% mandatory withholding
        • Be exempt from the 10% early withdrawal penalty
      • If a participant wants a loan, these limits have been temporarily increased to the lesser of $100,000 or 100% of the participants vested balance.
        • This is only going to apply to loans made on or before September 23, 2020.
        • This is only for the same group of eligible participants as described above.
      • You can also modify your plan to allow currently scheduled participant loan repayments.
        • A lot of the participants have monthly loan amounts taken out of their paycheck, so if those are scheduled to be repaid from March 27th, 2020, to December 31, 2020, you can allow these to be delayed for up to one year. Interest will continue to accrue so they need to make sure they know that.
        • If your plan does not currently have a loan option, then you will need to amend your plan to allow this.
      • Some of the elements of Require Minimum Distributions (RMD) have changed in that participants that turned 70.5 prior to 2019 will not be required to receive an ongoing RMD for 2020.
      • For participants who turned 70.5 in 2019 and who have not received their first RMD for 2019, they will not have to receive 2019 or your 2020.
      • If a 2020 RMD has already been issued, you can roll that over into an IRA or an employer plan and not pay taxes on that.
      • They are allowing these benefits to be adopted immediately and then a miniature plan will be created later down the road.

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