As the authors previously indicated in the email that was sent to you last Monday, March 23, 2020, we plan on providing a series of educational emails that will address certain issues likely to be relevant to businesses over the coming year as a result of the COVID-19 pandemic, including issues related to: (a) freeing up/strengthening cash positions; (b) business recapitalizations in connection with new capital infusions (i.e., third party bail outs); (c) debt capital restructurings; (d) structuring business exits/sales; and (e) estate planning opportunities.
What the authors of this email did not know last Monday, was that Congress and the President were going to pass H.R. 748, the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act” on Friday, March 27, 2020. The CARES Act provides a number of changes and additions to tax and other laws, many of which (including the favorable rules relating to the utilization of net operating losses, interest deductibility, etc.) are likely to be useful and helpful to businesses during 2020 and beyond. However, most importantly, the CARES Act has a couple provisions that have the potential to have a very direct and immediate impact of your cash position, so we have decided to focus our discussions this week on those items.
The CARES Act provides a number of favorable rules and laws for businesses and their employees, most notably the Payroll Loan referred to below, which will essentially constitute free money (BECAUSE OF ITS FORGIVABLE NATURE) to those businesses that use the available funds for the permitted purposes.Because of the limited funds earmarked to support various provisions in the CARES Act (including the Payroll Loan) YOU SHOULD ACT NOW TO MAKE SURE YOU RECEIVE THE MAXIMUM BENEFITS available to you. To the extent you have further questions about the CARES Act or any other recently enacted laws, please feel free to contact either of the authors.
Payroll Protection Program:
Pursuant to the Payroll Protection Program portion of the CARES Act, the federal government has provided small businesses (generally any business with fewer than 500 employees) with an opportunity to obtain a forgivable loan (a “Payroll Loan”) that:
- will be equal to 2.5 times the borrower’s average monthly payroll costs (subject to certain limitations);
- does not require collateral;
- does not require a personal guarantee;
- encourages the business to maintain its payrolls during the crises;
- can be forgiven without payment if the loan proceeds are used to pay for certain permitted expenses (including payroll expenses, rent, utilities, etc.); and
- will not result in federal income tax if forgiven.
The following three examples provide examples of three different businesses that can obtain a Payroll Loan:
Example 1: Mr. White owns a Ford dealership in Texas. Mr. White’s dealership has 100 employees. The dealership’s average monthly payroll is $500,000 per month. The dealership has experienced a massive decline in business over the last month. Hoping that things get better soon, the dealership has not yet laid off any employees. Mr. White’s dealership should consider the possibility of obtaining a Payroll Loan under the CARES Act. The dealership’s potential Payroll Loan could be an amount of: $500,000 x 2.5 = $1,250,000. The Payroll Loan should be forgiven in full provided that the dealership pays at least $1,250,000 for payroll expenses, rent, utilities, etc. during the 8-week period following receipt of the Payroll Loan.
Example 2: Dr. Washburn owns a dental practice in Texas. Dr. Washburn’s dental practice has 7 employees, including herself employed by her “S” corporation. The dental practice’s average monthly payroll is $60,000 per month. Dr. Washburn’s business has been shut down for the last two weeks based on CDC orders and Dr. Washburn has been forced to lay off her employees. Dr. Washburn would like to rehire her employees as soon as possible but does not currently have the cash necessary to pay her employees. Dr. Washburn’s dental practice should consider the possibility of obtaining a Payroll Loan under the CARES Act. The dental practice’s potential Payroll Loan could be an amount of: $60,000 x 2.5 = $150,000. The Payroll Loan should be forgiven in full provided that the dental practice rehires the employees and pays at least $150,000 for payroll expenses, rent, utilities, etc. during the 8-week period following receipt of the Payroll Loan.
Example 3: Mr. Smith owns a construction company. Mr. Smith’s construction company has 20 employees. The construction company’s average monthly payroll is $100,000 per month. Mr. Smith is concerned about the impact that the coronavirus is likely to have on his business, but to date, the business has remained relatively steady. The construction company has continued to operate full-time with all employees working regular hours. Mr. Smith’s construction company should consider the possibility of obtaining a Payroll Loan under the CARES Act. The construction company’s potential Payroll Loan could be in the amount of: $100,000 x 2.5 = $250,000. The Payroll Loan should be forgiven in full provided that the dealership pays at least $250,000 for payroll expenses, rent, utilities, etc. during the 8-week period following receipt of the Payroll Loan.
The CARES Act provides for an employee retention refundable tax credit against certain employment taxes. The credit applies to certain wages paid after March 12, 2020 and before January 1, 2021. The credit is applied against the employment taxes (employer’s portion of: (a) social security taxes at 6.2% via Code Section 3111(a); and (b) 6.2% tax via Railroad Retirement Act referral back to Code Section 3111(a)) that would have been deposited following the process of payroll, and the tax credit is equal to 50% of qualified wages in a calendar quarter. To the extent the credit claimed exceeds such employer’s payroll taxes, the credit is refundable. The credit applies to eligible employers:
- whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings; and/or
- who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
The amount of qualified wages with respect to any employee which may be taken into account under this credit by any eligible employee for all calendar quarters shall not exceed $10,000. More stringent rules pertaining to this credit apply to employers with more than 100 full-time employees.
This credit is NOT available to employers that have received a Payroll Loan under the Payroll Protection Program referred to above.
Delay in Payment of Payroll Taxes:
The CARES Act provides for the deferred payment of the employer portion of the Social Security tax. The deferral is for such taxes incurred for payroll beginning on March 27, 2020 and ending before January 1, 2021. Such social security taxes will be paid:
- 50% on or before December 31, 2021; and
- 50% on or before December 31, 2022.
Similar rules apply to 1/2 of the employment taxes owed by self-employed individuals.
The above rules do not apply to any taxpayer who has had a Payroll Loan forgiven under the Payroll Protection Program referred to above.
Brandon Jones, Shareholder
Winstead PC | 300 Throckmorton Street | Suite 1700 | Fort Worth, Texas 76102
817.420.8270 direct | 817.420.8201 fax
email@example.com | Winstead.com
Ryan Gardner, Member
Gardner Firm PLLC
801 E. Campbell | Suite 245F | Richardson, Texas 75081
6793 Old Jacksonville | Suite B | Tyler, Texas 75703
214.393.2402 Richardson | 903.705.1101 Tyler | 903.787.5955 Fax
firstname.lastname@example.org | www.gardnerfirmpllc.com