In light of the burgeoning Coronavirus economic fallout, on Friday March 27th Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES"). The law provides $2 Trillion of economic stimulus to both individuals and businesses through loans, grants, tax refunds and expense deferral.

We are prioritizing here those opportunities which can potentially provide the greatest and most immediate benefits: 

Small Business Loan Programs: 

Paycheck Protection Loans

For businesses with fewer than 500 employees, including sole proprietors and nonprofits, the CARES Act provides Small Business Act (SBA) loans that can be applied for through your bank.  Up to $10 million of Paycheck Protection Loans  can be used to provide working capital to cover payroll and certain other operating expenses. In some circumstances, the amount borrowed that is disbursed for certain expenses incurred in the first 8 weeks will be forgiven tax free.  Amounts in excess of that are repayable monthly over 10 years. An additional deferral of 6 months to one year is also available.  SEE EXHIBIT 1* below for more details. 

Expanded SBA's Disaster Loan Program 

These loans are available between January 31, 2020 andDecember 31, 2020. Businesses that apply are also eligible for a one-time grant of up to $10,000 even if they do not ultimately qualify for the loans. More businesses will qualify under the new rules, as approval requirements have been relaxed and payments can be deferred. 

PW Observations: 

Please check the SBA website or speak to your banker regarding applying for the loans.  The SBA has already placed a streamlined loan application on its website with respect to COVID-19 ECONOMIC INJURY DISASTER LOAN (SEE EXHIBIT 1* below). We understand that the SBA is updating its website and will have an online application for the PPL within the next several days. There is no guidance yet about the time needed to process the loan applications; however in our discussions with bankers, it will take up to 3-4 weeks before guidance is provided to administer and disburse the loan proceeds. We are here to help and available to assist you in referring bankers or SBA representatives

Payroll Tax Credit and Deferral: 

Employee Retention Credits 

For businesses (including sole proprietors and nonprofits) whose (1) operations are fully or partially suspended as the result of government order or (2) whose gross year-over-year quarterly receipts have decreased by more than 50%,  the CARES Act provides a refundable credit against the employer's 6.2% share of Social Security payroll taxes. For employer's who averaged less than 100 employees in 2019, a credit of up to $5,000 per employee is available on 50% of wages paid to an employee between 3/12/2020 and 12/31/2020. Thus the first $10,000 of wages per employee will yield a $5,000 payroll tax credit.   The credit is also available to employers who averaged more than 100 employees in 2019 but only on those employees furloughed that the employer continues to pay during the shut-down. Those  businesses who take small business loans described above are not eligible for this credit.  

Deferral of Employer Payroll Taxes

The CARES Act allows the employer's share of the 6.2% Social Security tax that would otherwise be due from the date the Act passes to December 31, 2020, to be paid half (50%) on December 31, 2021, with the other half (50%) due on December 31, 2022.  The same rule applies to a self-employed individual with respect to half (50%) of their self-employment tax. No deferral is permitted to the extent of any loan forgiveness under the Paycheck Protection Loan Program described above. 

PW Observations: 

Please  check with your payroll processing provider as to (1) how to apply the credits against the employer payroll taxes and/or obtain a refund of the credit and (2) how to administer the deferral of payroll taxes.  We are here to help and can assist where necessary in explaining details of the opportunities to you and payroll providers. 

Utilization of Business and Net Operating Losses: 

Deduction of Business Losses 

For individual taxpayers the Tax Cuts and Jobs Act of 2017 (TCJA) limited business losses available to offset other income to $250,000 and $500,000 for single and married filers respectively, with the excess carrying over to future years.  The CARES Act suspends this law for 2018, 2019 and 2020.  Returns filed for 2018 (or 2019) can now be amended to fully deduct the losses against other income and claim a refund. 

Net Operating Losses 

The CARES Act allows 2018, 2019, and 2020 NOLs to be carried back up to 5 years and carried forward without limitation.  The CARES Act thus reverses the TCJA which had eliminated net operating loss carrybacks and limited the amount of income that carryforwards could offset in any given year to 80% of taxable income. The carryback enables recovery of taxes paid in prior years which also had higher individual and corporate rates. 

Qualified Improvement Property 

The CARES Act makes a technical correction to TCJA with respect to qualified improvement property [QIP] which (1) shortens the depreciable life to 15 years from 39 years and (2) allows for 100% bonus depreciation expense.   This change is retroactive to January 1, 2018, so if you have QIP property you may amend prior years' returns and achieve a greater deduction much sooner.   

Modification of Limitation on Business Interest 

For 2019 and 2020, the CARES Act increases the amount of interest expense that businesses are allowed to deduct currently to 50% of taxable EBIDTA from 30%.

PW Observations: 

PW will amend returns to recover taxes paid in 2018 by identifying clients who were subject to loss limitations in 2018 and; any resulting NOLs will be carried back in order to obtain additional tax refunds. We are also identifying clients who may significantly benefit from claiming bonus depreciation on Qualified Improvement Property and will evaluate amending such returns as well.

Individual Relief Provisions: 

Delays, without interest or penalties, from April 15th to July 15th, 2020 the due dates for returns and payment of taxes and first quarter 2020 estimated payments. (New York State has officially adopted the revised federal due date; other states have or are in the process of conforming. Certain Federal and local returns do not conform to the extended federal due date; PW will appropriately identify those situations so as to avoid interest and penalties)

Provides for payments of advanced "tax credits" of up to $1,200 per individual U.S. citizens and residents and $500 per child.  Payments are only available to Married Filing Joint and Single taxpayers with adjusted gross incomes below $198,000 and $99,000, respectively and are phased out for incomes above $150,000 and $75,000, respectively.  The payments will be based on 2018 returns, and/or for non-filers on social security numbers, or 2019, to the extent the return was filed. (We can assist to true up the credit where necessary.)

Required Minimum Distributions (RMDs) are waived for 2020. (We are awaiting clarification as to whether RMD distributions already taken this year can be recontributed to avoid current taxable income.)

Cash charitable contributions made in 2020 are not limited to 60% of the contribution base (contributions to donor advised funds do not qualify)

For individuals medically or financially affected by the coronavirus, there is a waiver of early withdrawal penalties on the first $100,000 of retirement plan distributions, the ability to recontribute the distributions to the plan within three years of distribution without any tax, and the option to pay any tax on distributions that are not recontributed over three years.

PW Observations: 

We are monitoring state and local developments to see which federal tax provisions are adopted in whole or in part. Many states including New York base taxable income on federal adjusted gross income with modifications. Some states, such as New Jersey and Connecticut, are based on gross income.

Please do not hesitate to contact with any questions or concerns. 
www.pwcpa.com 
212 605 3100

Perelson Weiner LLP Certified Public Accountants
299 Park Avenue,
New York, New York 10171-0002

EXHIBIT 1 – PPL

Addendum Paycheck Protection Loans

For businesses with fewer than 500 employees, including sole proprietors and nonprofits, the CARES Act provides Small Business Act (SBA) loans from February 15, 2020 through June 30, 2020 (the “covered period”). These loans are referred to as Paycheck Protection Loans (PPL) and are designed to keep people employed. 

The loans are repayable over ten years, subject to a 6 month to one-year deferral from date of loan.

No guarantees or collateralization is required of the business or its owners.

As discussed below the loans can be forgiven to the extent that in the first eight weeks of receiving the loan, the proceeds are expended on payroll costs, rent, mortgage interest, and/or utility payments.

The interest rate on the PPL cannot exceed 4%. Any portion of the loan that is not forgiven is generally repayable monthly with interest over a ten-year term subject to a deferment discussed below.

The maximum loan is limited to the lesser of:

• $10 million

• The sum of the average monthly “payroll costs” for the one-year period ending on the date the loan was made, multiplied by 2.5, plus any SBA disaster loan funded after January 31, 2020 that has been refinanced into a paycheck protection loan.

“Payroll costs” include:

• Wages, commissions, salaries, or similar compensation to an employee or independent contractor,

• Cash tips,

• Paid time off, including vacation, parental, family, medical or sick leave,

• Dismissal and/or separation pay,

• Group healthcare benefits, including insurance premiums,

• Retirement benefits, and

• State or local taxes assessed on the compensation of employees.

“Payroll costs” exclude:

•  Annual compensation for an employee greater than $100,000,

• Payroll taxes,

• Payments to an employee whose principal place of residence is outside the U.S., and

• Sick leave or family medical leave under the Coronavirus Relief Act where the employer receives a credit.

Loan Forgiveness and Repayment Provisions:

The CARES Act has a provision allowing for tax-free forgiveness of Paycheck Protection Loans to the extent the funds are used for payroll costs, rent, mortgage interest, and/or utility payments by the borrower during the first eight weeks after the loan date. Qualifying mortgages, leases and utility service must have commenced prior to February 15, 2020.

To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and cancelled checks showing mortgage, rent, or utility payments. Forgiveness amounts will be reduced for any employee cuts or reductions in wages.

PW Observation: It is unclear whether the loan proceeds can be deposited into general funds or whether they should be segregated to disburse “Payroll costs”, rent, mortgage interest, and/or utility payments. We suggest prudence dictates segregation.

Repayment of the remaining principal, interest and any fee balances can be deferred for at least 6 months and not more than a year. Borrowers may apply for deferral and lenders must allow for such deferral for at least 6 months.

 As noted above, Economic Injury Disaster Loans obtained after January 31, 2020 may be refinanced with proceeds of a PPL. In such cases the maximum available loan amount is increased by the amount of disaster loans being refinanced. The refinanced loan proceeds become subject to all the conditions and limitations of the Paycheck Protection Program explained above.