Coronavirus Franchise SBA Stimulus Program
The entire world has been affected by the Coronavirus Pandemic, the franchise industry is certainly part of this sweeping downturn initiated by the virus. As franchised small businesses, the timing of this stimulus program and the terms are positioned well to help us as franchise industry owners get through this terrible situation and emerge with new life in the second half of 2020. Use the resources and leverage our government’s support to help your franchised business or franchisor entity get through Coronavirus.
CARES Act Summary
The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a roughly $2 trillion bill intended to provide emergency assistance and healthcare response for individuals, families, and businesses affected by the COVID-19 pandemic. The measure provides direct financial aid to American families, payroll and operating expense support for small businesses, and loan assistance for distressed industries.
Top Takeaways for Restaurants, their owners, and employees:
- Provides stimulus to individuals and businesses in response to the economic distress caused by the coronavirus (COVID-19) pandemic.
- The Paycheck Protection Act creates a $349 billion loan program for small businesses, and expands the definition of such businesses for the purposes of these loans. Paycheck Protection Program loans can be forgiven through a process that incentivizes companies to retain employees and their compensation. Special consideration given to restaurants and accommodations.
- Penalty-Free Coronavirus-Related Distributions from Eligible Retirement Plans. The CARES Act permits employers and plan sponsors to allow participants in eligible retirement plans to receive Coronavirus-Related Distributions (CRDs) up to $100,000 without incurring the 10 percent early distribution penalty tax that would otherwise generally apply to payments made prior to age 59 ½.
- Provides direct payments in the form of a refundable tax credit to American taxpayers — $1,200 to Americans making $75,000 or less ($150,000 in the case of joint returns and $112,500 for head of household) and $500 for each child, to be paid “as rapidly as possible.” An online calculator for the amount one can expect to receive can be found here https://www.washingtonpost.com/graphics/business/coronavirus-stimulus-check-calculator/
- Expands eligibility for unemployment insurance and provides people with an additional $600 per week, in addition to the amount determined by each state.
- Provides tax relief to business and individuals, both deferments of deadlines and waivers of certain taxes.
- Expands telehealth services in Medicare, including services unrelated to COVID-19 treatments.
- Provides the Secretary of the Treasury with the authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens a variety of regulations prior legislation imposed through the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Economic Stabilization Act of 2008, and others.
Tax Implications of CARES
Net Operating Loss (NOL) Rule Relaxation –Losses arising in 2018, 2019 and 2020 can be carried back to the five preceding years.
- Losses can fully offset taxable income—80 percent limitation temporarily removed.
- These two changes would effectively undo TCJA’s NOL changes for 2018 through 2020, resulting in an estimated benefit of about $25.5 billion to corporations (and $169.6 billion for other taxpayers).
Employer Payroll Tax Delay
- Employers can defer the 6.2 percent payroll tax due for rest of year until end of 2021, 2022.
- Congress thinks the net cost of this provision is about $12.3 billion, although estimates of the amount of extra cash this would provide businesses are much larger (depending on unemployment, about $732 billion over the next two years).
- As soon as the CARES Act is signed into law, the deferral period will start. It goes through December 31, 2020.
Employee Retention Payroll Tax Credit
Certain employers may receive a payroll tax credit of as much as $5,000 per employee for wages (and health benefits) paid after March 12, 2020, and before January 1, 2021.
- If the credit amount exceeds the employer’s liability, the excess shall be refundable. It is estimated that the credit will provide an aggregate benefit of about $54.6 billion.
- Any employer whose business was fully or partially suspended in 2020 due to government orders associated with COVID-19 or that experienced a significant decline in gross receipts (or that is a tax-exempt organization) may be eligible to receive this refundable employment tax credit
Increase of Interest Expense Deduction Limitation
In 2019 and 2020, corporations can deduct more of their borrowing costs (up to 50 percent of their earnings, instead of only 30 percent of their earnings).
Modification of Refundable Minimum Tax Credit
Corporations with eligible minimum tax credits may accelerate their refunds.
- Corporations are no longer subject to the alternative minimum tax (AMT), as it was repealed for such taxpayers by TCJA Tax Cuts and Jobs Act
Technical Correction to Fix ‘Retail Glitch’
Businesses can fully deduct the cost of certain property improvements back to 2018.
On March 20, the IRS issued Notice 2020-18, confirming that any person with a Federal income tax payment or return due April 15, 2020, will be provided an automatic postponement of such deadline to July 15, 2020. State deadlines vary.
Keeping American Workers Paid and Employed Act
Paycheck Protection Program
- The loan program will allow businesses suffering due to the coronavirus outbreak to borrow money for a variety of qualified costs related to employee compensation and benefits
- The legislation greatly expands the number of businesses (including non-profits) that are eligible for SBA loans and raises the maximum amount for such a loan
- Companies that employ no more than 500 employees are (or a greater number based on the size standard applicable to the industry) may be eligible. Certain companies in the Accommodation and Food Services Industry (NAICS Code 72) may be eligible if they have no more than 500 employees per physical location.
- Encourages employers to rehire any employees who have already been laid off due to the COVID-19 crisis
- Loans are available between 2/15/2020 and 6/30/2020
- Prospective borrowers can apply for the Paycheck Protection Program (PPP) at any lending institution that is approved to participate in the program through the existing U.S. Small Business Administration (SBA) 7(a) lending program and additional lenders approved by the Department of Treasury.
LOAN AMOUNT – The lesser of:
- $10M; or
- 2.5x the average monthly Payroll Costs over the one year prior to the loan.
- “Payroll Costs” include:
- Family leave
- Sick pay
- Separation or dismissal payments
- Contributions to group health insurance benefits
- Payment of retirement benefits
- State and local tax payments on payroll
- Excluded: Salaries over $100k
- “Payroll Costs” include:
- May be used for:
- Payroll costs
- Contributions to health coverage
- Interest on debt
ELIGIBLE BUSINESSES – any business concern:
- with less than 500 employees;
- For companies with NAICS code beginning with 72 (Accommodation and Food Service), the 500 employee limit applies per physical location.
- Ten year maturity period – to the extent not forgiven
- No more than 4% interest
- No personal guaranty
- No recourse to owners/directors/officers
Prospective borrowers can apply for the Paycheck Protection Program (PPP) at any lending institution that is approved to participate in the program through the existing U.S. Small Business Administration (SBA) 7(a) lending program and additional lenders approved by the Department of Treasury. This could be the bank you already use, or a nearby bank. There are thousands of banks that already participate in the SBA’s lending programs, including numerous community banks. Borrowers do not have to visit any government institution to apply for the program, but can find SBA-approved lenders in your area through SBA’s online Lender Match tool https://www.sba.gov/funding-programs/loans/lender-match. Local Small Business Development Center https://www.sba.gov/tools/local-assistance/sbdc/ or Women’s Business Center https://www.sba.gov/local-assistance/find/?type=Women%27s%20Business%20Center&pageNumber=1 can provide free assistance and guide you to lenders.
Emergency Economic Injury Disaster Loans (“EIDLs”)
- For the period between January 31, 2020 and December 31, 2020 (the “covered period”) EIDL eligibility is greatly expanded. A comparison of the PPP and EIDL programs is here https://www.krostcpas.com/news/the-economic-injury-disaster-loan-eidl-program-vs-the-paycheck-protection-program-ppp
Assistance for American Workers, Families, and Businesses
Unemployment Insurance Provisions
- The law expands the scope of individuals who are eligible for unemployment benefits, including those who are furloughed or out of work as a direct result of COVID-19.
- The law provides an increase of $600 per week in the amounts customarily available for unemployment under state law. This increase applies for unemployment payments made from the date of the law’s enactment through July 31, 2020 (approximately four months).
- Beginning in 2020, “eligible individual” taxpayers can benefit from a tax credit equal to the sum of: (i) $1,200 for single filers ($2,400 for those filing a joint return) plus (ii) an amount equal to the product of (a) $500 multiplied by (b) the number of qualifying children.
Tax Treatment of Coronavirus-Related Distributions
- Qualified employer plans may permit individuals who elect to receive a “coronavirus-related distribution” will not be subject to the traditional 10% tax penalty imposed under the Internal Revenue Code of 1986
- The limitation on loans from any qualified employer plan made to qualified individuals during the 180-day period beginning on the date of enactment will be increased from $50,000 to $100,000. Should the due date of any loan occur between the date of enactment of the CARES Act and December 31, 2020, it will be delayed for one (1) year.
Employee Retention Credit for Employer Subject to Closure Due to COVID-19
- Eligible employers will receive a credit against applicable employment taxes for each calendar quarter in an amount equal to 50% of the qualified wages.
- The CARES Act will allow for most employers to defer paying their share of applicable employment taxes from the time the CARES Act is signed into law through December 31, 2020.
- There will generally be a temporary repeal of taxable income limitation including (i) in the case of a taxable year beginning before January 1, 2021
Paid Public Health Emergency Leave Minimums
- Employers may, but are not required to, pay any more than $200 per day and $10,000 in the aggregate for each employee for public health emergency leave
Coronavirus Stabilization Act of 2020 – Section IV of the CARES Act
This section provides $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund. Additionally, this includes $25 billion in lending for airlines, $4 billion in lending for air cargo firms, and $17 billion in lending for firms deemed critical to U.S. national security. Firms taking loans must not engage in stock buybacks for the duration of the loan plus one year and must retain at least 90 percent of its employment level as of March 24, 2020. Loans also come with terms limiting employee compensation and severance pay for firms taking loans. Emergency lending will be overseen by a Congressional Oversight Commission and a Special Inspector General.
Emergency Relief and Taxpayer Protections
- The scope of the Stabilization Act is very broad, but this is where Congress imposed limitations, in response to criticism of the TARP bill during the last economic crisis.
- Any United States business that has not “otherwise received adequate economic relief in the form of loans or loan guarantees provided under this Act” is an “eligible business” and losses covered by the Stabilization Act include “losses incurred directly or indirectly as a result of coronavirus, as determined by the Secretary.”
- Direct Lending to Specified Industries – Up to $46 billion will be available for direct lending to certain industries as follows:
- $25 billion for loan and loan guarantees for passenger air carriers, eligible businesses that provide inspection, repair, replace, or overhaul services, and ticket agents;
- $4 billion for loans and loan guarantees to cargo air carriers; and
- $17 billion for loans and loan guarantees to critical national security businesses.
- Businesses that receive loans through these Federal Reserve programs
- There are significant controls/limitations placed on funds under this section. Companies are prohibited from paying dividends or repurchasing stock (or other outstanding equity interests) while the loan or loan guarantee is outstanding; there are compensation caps for officers and employees at companies receiving loans or loan guarantees; and companies which receive funds must remain neutral in any future union organizing campaign, during the term of the loan.