The “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) (Pub. L. No. 116-136) signed into law on March 27, 2020—in addition to its numerous tax provisions—establishes two important lending programs:
Together, these two programs provide nearly $900 billion to support lending to both small and large businesses. The following discussion outlines the requirements for the paycheck protection program, the economic stabilization fund, and the interaction of those programs with the tax provisions of the CARES Act.
A provision for small businesses in the CARES Act is the appropriation of $349 billion to expand the guaranteed lending program under Section 7(a) of the Small Business Act. The new PPP is the major part of this expansion.
Read a Treasury information sheet [PDF 223 KB] regarding the PPP.
Eligible borrowers under the PPP include almost all small businesses—as well as individuals who are sole proprietors and independent contractors—and nonprofit organizations. The requirement to qualify as a “small business” is:
There are exceptions to the general eligibility rules:
Loans under the PPP can be for amounts up to 2.5 times a business’s average monthly payroll costs, but capped at $10 million.
The definition of “payroll costs” includes more than just salary (it can include tips, benefits, insurance, and retirement benefits) but generally excludes compensation for highly paid employees ($100,000+ per year) and non-U.S. employees.
A key feature of the PPP is that loan proceeds used by borrowers to pay certain expenses during the eight-week period following origination of the loan (the covered period) are eligible to be forgiven.
The CARES Act authorizes the SBA to increase the limit on its “express loan program” to $1 million (from the current $350,000).
The CARES Act also expands the SBA’s “economic injury disaster loan program” by streamlining certain requirements and expanding the categories of businesses who are eligible to apply. For existing borrowers with SBA-backed loans that are not delinquent, the CARES Act requires the SBA to step in and make the borrowers’ payments for a six-month period, with the borrower having no obligation to repay such amounts.
The CARES Act includes a $500 billion authorization for the Treasury Department to make loans, guarantees, and provide other financial support to eligible businesses as well as state and local governments.
The Treasury Department is authorized to publish regulations to fill in the details on rules and requirements of the various programs that it will administer.
The following discussion outlines the general rules and requirements.
There are a variety of programs under Treasury’s purview as part of the CARES Act, but in all cases, it appears that assistance will only be available to U.S. businesses organized under state or federal law that have significant U.S. operations and a majority of their employees in the U.S.
In addition, loans will not be made to insolvent entities or those intending to lend to insolvent entities.
It appears that the Secretary of the Treasury has discretion to set the terms and conditions of the assistance to be provided under these programs. In terms of loans:
To the extent Treasury provides assistance to a program or Federal Reserve facility that makes direct loans to eligible businesses, borrowers must agree that during the term of the loan and for an additional 12 months thereafter, there will be:
There is no requirement that businesses receiving indirect support from Treasury under any of these programs maintain employment levels.
The CARES Act provides that the Secretary of the Treasury is to “endeavor to” have the Federal Reserve implement a program to help provide financing to eligible businesses with between 500 and 10,000 employees. The aspirational nature of this language makes predicting the timing and scope of this program difficult, but there are additional terms and conditions.
In addition to the programs that will be administered through the Federal Reserve and its existing networks, the CARES Act authorizes the Treasury Department to designate financial institutions to act as its agents for purposes of fulfilling the mandates of the new law.
The Treasury Department is also required to publish regulations or guidance regarding this program under the new law within 10 days.
In addition to the eligibility requirements of the lending provisions outlined above, there are important interactions with the tax provisions of the CARES Act that need to be considered.
The CARES Act creates a new “employee retention tax credit,” which very generally provides a tax credit for wages paid by certain employers affected by the coronavirus crisis. This new credit is, however, not available to employers who also receive a loan under the PPP loan program. Thus, eligible taxpayers may claim the employee retention tax credit or an SBA loan, but not both.
Read KPMG’s report [PDF 3.1 MB] on the tax provisions in the CARES Act.
A similar rule applies with regard to the payroll tax deferral provision of the CARES Act. That provision generally allows an employer to delay payment of the employer portion of payroll tax until 2021 and 2022.
This payroll tax deferral also has a limitation based on SBA program, although it is not identical to the limitation for the employee retention tax credit. The CARES Act provides that taxpayers who receive a PPP loan and also apply the loan forgiveness feature of that program, are ineligible for the payroll tax payment deferral.
In conclusion, the interaction of these payroll-related tax provisions with the loan program need to be considered by taxpayers in determining whether and how to claim benefits under the CARES Act.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Tom West | +1 (202) 533-3212 | email@example.com
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