The federal government has devoted unprecedented resources to offset the economic losses caused by COVID-19. By now, most people have heard of the Coronavirus Aids, Relief and Economic Security (CARES) Act and the loans that are available under its popular Paycheck Protection Program (PPP). If you are not familiar with this program, here is a link to our comprehensive webinar on the topic. This program is especially popular because it provides funds to cover payroll costs that are easy to apply for, immediately available and forgivable if conditions are met. If not forgiven, the loans have an interest rate of 1% and must be repaid over 24 months. With limited sources of revenue and credit, businesses are looking for ways to obtain cash or defer costs to weather the storm. In addition to the PPP, here are some other government programs and refundable tax ideas that could help.
Economic Interruption Disaster Loan (EIDL)
Another CARES Act program is the Economic Interruption Disaster Loan (EIDL). EIDL’s are low interest loans that have no penalty for early payoff. These loans are issued by the Small Business Administration (SBA) directly.
Any business with fewer than 500 employees may apply for an EIDL. The company must have been in business since February 15, 2020 or earlier and must be able to show payroll taxes were filed on behalf of affected employees. Self employed people and independent contractors may also be eligible.
The maximum loan amount is $2 million. The actual loan amount is determined by the SBA based on gross revenue and cost of goods sold in the previous year. Applicants can request up to $10,000 in advance, which will be distributed within 3 days. Applicants are not required to pay a fee if they are denied a loan.
EIDL’s are not forgivable and bear interest at 3.75% for commercial companies and 2.75% for nonprofits. Repayment terms are up to 30 years, starting one year after the initial borrowing. Loan proceeds may be used to cover any expenses that could have been met if the disaster not occurred. The SBA does take a lien against the borrower’s assets, and the process takes 2-3 weeks.
EIDL’s require a lien against assets, and they are not forgivable. However, they can be used for a broader list of expenses than PPP loans. In some cases, a Company may be able to benefit from both.
Research and Development Credit
For Qualifying Small Businesses (QSB’s), credits for research and development costs incurred are available to offset the employee portion of FICA tax, even if a company is unprofitable. QSB’s must have less than $5 million in annual gross receipts, among other criteria. The maximum available credit is $250,000 per year for five years, and prior FICA tax paid may be recovered.
Although many people associate research and development with computers, software and semiconductors, the actual definition is broad. To be eligible, a QSB must incur expenses that are intended to resolve technological uncertainty, rely on a hard science, and relate to the development of new or improved products, processes, internal use computer software, techniques, formulas, or inventions.
This includes 100% of wages and supplies expense used in research, 65% of contract expenses, and 75% of expenses incurred with a qualified educational institution.
Although the refundable credits are available immediately, they require filing or amending Federal tax returns with the R&D credit claim.
Other CARES Act Programs
For companies that can’t take advantage of loans under the PPP or EIDL, the CARES Act has several other programs that could help.
Payroll Tax Deferral: Employers can defer paying the employer portion of payroll taxes (6.2%) on wages up to $137,700 per employee from March 27, 2020 to December 31, 2020. Half the deferred taxes must be paid by December 31, 2021, and the other half is due on December 31, 2020.
This program is not available to PPP borrowers. Also, as business owners and corporate officers may be personally liable for payroll taxes, use caution when taking advantage of this program.
Employee Retention Tax Credit: This program allows a Company to receive a tax credit of up to 50% of qualified wages and health plan expenses paid in the period from March 12, 2020 to January 1, 2021. The maximum available credit under this program is $5,000 per employee.
To be eligible, an employer must show a decrease in gross receipts of 50% or more from the comparable quarter in 2019. Eligibility ends once an employer’s 2020 gross receipts are more than 80% of the comparable 2019 quarter. The credit is claimed as part of filing the quarterly payroll tax Form 941.
Employers who receive loans under the PPP are not eligible for this credit. Also, an employee cannot receive this credit on wages for which a credit under the Families First Coronavirus Response Act (FFCRA) is received.
Families First Coronavirus Response Act (FFCRA) FFCRA provides credits for the cost of paid time off taken for coronavirus. Credits are claimed through the Form 941 filing process as the employee retention tax credit above.
Other Tax Law Changes
Certain other tax law changes were made in response to COVID-19. If any of these circumstances apply to your company, they can generate immediate cash refunds from the government.
Net Operating Losses: If your company is a taxable entity and has paid income taxes in the past several years, you might be eligible to use net operating losses to require taxes that were paid previously. (Sorry, this does not help partnerships or Subchapter S corporations.) You will need to amend prior tax returns to apply loss carryforwards against prior profits to generate an immediate refund.
Business Interest: The 2017 tax reform limited the deductibility of certain corporate interest expenses. If your interest expense deduction was limited in the prior year, you can amend your prior return to take the full deduction. Depending on other factors, this could generate an immediate cash refund.
Depreciable Lives: If you have purchased capital assets in recent years, you now can amend the tax lives of those assets and make them eligible for immediate tax deductions.
The Federal government has passed several recent laws that should help to get cash into the hands of businesses and help them through the current pandemic. If you have questions on any of these refundable tax ideas, please contact us. For more information and resources on COVID-19, see our coronavirus page.
Mike Drexler, CPA