We could all use some aid, relief, and economic security right now. Fortunately, that’s exactly what a new federal assistance bill seeks to provide. In March, the United States enacted the Coronavirus Aid, Relief, and Economic Security Act—or CARES Act for short.
We explored the historic law in an earlier blog post, focusing primarily on the billions of dollars available in Small Business Administration-guaranteed loans. But the SBA’s loan program is only one component of the CARES Act and its impact on you and your organization.
Here are a few more key facts you should know about the CARES Act:
How does the CARES Act help my business?
The CARES Act offers multiple forms of financial assistance for businesses affected by the COVID-19 pandemic. One option is the Paycheck Protection Program, which allows organizations to apply for emergency loans that cover up to 2.5 times their average monthly payroll costs. (Read more about the emergency loans and the Paycheck Protection Program here.) Another option is a tax credit that also covers payroll costs.
So my business gets rewarded for keeping people employed?
Yes. Both the business loan program and the tax credit are designed to help employers who retain their employees. If you let people go, you won’t be able to access the full benefits of the CARES Act.
How does the CARES Act tax credit work?
The CARES Act offers an employee retention credit to any eligible employer (we’ll go over eligibility in a bit). It’s a tax credit for 50% of the wages employers pay during the COVID-19 crisis. The credit will apply to wages between March 13th and December 31st, 2020.
Who’s eligible for the CARES Act tax credit?
To be eligible for the tax credit, your business must fall into one of two categories:
1. Your business was fully or partially suspended by government order due to COVID-19 during the calendar quarter.
2. Your gross receipts are below 50% of the comparable quarter in 2019. If your gross receipts exceed 80% of a comparable quarter in 2019 (e.g. you made $200,000 in Q3 2019 and make at least $160,000 in Q3 2020), your business no longer qualifies at the end of that quarter.
Assuming you fit into category 1 or 2, the tax credit is available to you, even if you run a tax-exempt organization.
However, there are caveats and restrictions to be aware of. If you had more than 100 employees on average in 2019, the credit is allowed only for wages paid to employees who did not work during the calendar quarter. Otherwise, if you had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. As long as the employees worked full time and were paid for full time work, you can receive the credit.
Can I get both an emergency loan AND the tax credit?
No. It’s an either–or scenario—you can choose to apply for an emergency loan OR receive the tax credit.
Which choice is better for my business: the loan or the tax credit?
That depends. First, you’ll need to determine if you’re eligible for the loan.
The Paycheck Protection Program is only available to employers with 500 or fewer employees. There are exceptions. If your business is classified under NAICS code 72 (Accommodation and Food Services), you can apply for the loan as long as you have no more than 500 employees per physical location.
Once you’ve determined your eligibility, make sure to speak to your CFO, CPA, financial advisor, attorney, or other trusted advisor about which choice is best for you and your business.
If I take out a loan, can I use the emergency funds for anything?
No. Employers should be aware of another federal law—the Families First Coronavirus Response Act (FFCRA)—and the restrictions that law places in terms of family and medical leave. The SBA loans can be used for payroll costs, healthcare, rent, and utilities, but not for leave payments under the FFCRA. Those funds are separate. The loan cannot cover costs of the FFCRA paid leave under the Emergency Family and Medical Leave Act (FMLA), or the costs of emergency paid sick leave.
What if I rehire someone? Do I have to provide them with paid leave?
The CARES Act added new language to address leave entitlement. For the purposes of the Emergency FMLA, the term “employed for at least 30 calendar days” includes anyone who was laid off on or after March 1st, 2020, had worked for the employer for no less than 30 of the last 60 calendar days prior to their layoff, and was rehired. This means that almost any rehired employee who meets that criteria is eligible for Emergency FMLA—the clock on the 30-day requirement doesn’t restart.
What other benefits should I know about?
There are several more forms of COVID-19-related financial assistance employers and employees should be aware of.
- First, the IRS is deferring payment of Social Security tax. Specifically, employees can choose to defer the payment of their portion of Social Security taxes. You can still withhold from your employees, but you don’t have to pay their portion. Keep in mind that this is a deferral: you’ll be required to pay it back over the next two years if you take advantage of this option.
- Unemployment coverage has been expanded. This applies to many people who have lost their jobs, had their hours cut, or became unable to work due to the COVID-19 pandemic between the dates of January 27th and December 31st, 2020. Individuals will now receive unemployment benefit assistance when they’re not entitled to any other unemployment compensation or waiting period credit. A covered individual will generally receive the amount determined under their state law—plus an additional $600 until July 31st. Essentially, the federal government is providing additional funds to states, giving an extra $600 for claims during this time. Otherwise, the application for the unemployment benefit stays the same. Given that the $600 per week is available for the next 4 months, the maximum entitlement has been expanded to 39 weeks rather than 26 weeks (the typical maximum period in most states).
- There’s also a special early withdrawal rule for retirement funds. As has happened in the past with other disasters and crises, the government is waiving the 10% early withdrawal penalty—but only for “coronavirus-related” purposes, as determined by the Department of Treasury. Look for additional detail and clarifications as to what they find to be coronavirus-related. In any case, the 10% early withdrawal penalty will be waived for any withdrawal after January 1st, 2020.
What about those $1,200 checks?
This is the part of the CARES Act many people are already familiar with. As you may have learned from the news, the government is sending cash rebates to individuals. Millions of US citizens will soon receive $1,200 per person (or $2,400 for married couples), as well as an additional $500 per qualifying child under age 17. The IRS will be handling these payments directly. You don’t have to apply to receive them; they’ll be paid automatically. Expect the IRS to provide further details soon.