CARES Act for Contractors – A Simple 4-Step Action Plan
You have been inundated with information related to the Coronavirus Aid, Relief and Economic Security (CARES) Act since Phase III was signed into law late on March 27th. Knowledge is Power, but the extent of that power lies in how the knowledge is utilized. Now that you have gathered all the facts, it is time to implement an action plan that will help your company navigate these unprecedented times by fully utilizing the resources made available by the CARES Act.
Step 1: Workforce Considerations
Due to the pandemic, contractors are finding it increasingly difficult to keep employees productive, and they are struggling with a dilemma. Do I keep paying my loyal employees even if they are no longer producing the revenue needed to be able to pay them? Do I lay them off? Do I furlough them? Should the provisions of the CARES Act factor into my decisions? These are all legitimate questions contractors are having to ask themselves.
The CARES Act does provide some economic relief to employers in the form of forgivable loans, but the answers to the questions posed above should be analyzed prior to the receipt of relief funds. However, the CARES Act did provide one major incentive that should be considered when deciding whether to lay off employees. Unemployment insurance provisions now include an additional $600 per week payment to each recipient for up to four months. When $600 is added to the state unemployment already available, it is likely employees may make more money in the interim period on unemployment than as an employee. Sending employees to unemployment may negatively affect the company’s unemployment rating, but the additional Federal unemployment compensation to the employee should be considered. It is a potential win-win in the near term.
Step 2: Tap into Available Funding
The Small Business Administration (SBA) is authorized to administer several loan programs for companies impacted by the Coronavirus pandemic. It is critical that contractors tap into available funding as soon as possible. Contractors should consider each of the following:
- SBA Express Bridge Loans – The express bridge loans are available to small businesses with existing relationships with an SBA Express Lender. Small businesses can access up to $25,000 with limited paperwork. These are intended to provide urgent cash during the interim period before receiving funds from the following loans.
- Economic Injury Disaster Loan and Loan Advance – These loans are provided to small businesses experiencing a temporary loss of revenue. These loans can be issued up to $2,000,000 with a request for an advance of up to $10,000. The advance of $10,000 would be received within 3 days of application for those currently experiencing a loss of revenue, and the advance amount does not have to be repaid.
- SBA Debt Relief – The SBA is offering to pay principal and interest of new 7(a) loans issued prior to September 27, 2020 and will pay the principal and interest of current 7(a) loans for a period of six months. The 7(a) loan program is the SBA’s primary program for providing small businesses with funding.
- Paycheck Protection Program – This loan has potential to be the most beneficial to contractors due to the forgiveness of required repayment if certain costs are incurred during an 8-week period after the loan is made. Since this loan is intended to encourage businesses to keep employees, the forgiveness component will be tied to payroll costs. In addition to payroll costs, the loan funds can be used for facility costs such as interest on mortgages, rent and utilities.
Step 3: Business Tax Incentives
The next step is to analyze the tax incentives of the CARES Act to analyze the benefit compared to the financial benefit of the loans outlined above. In most cases, you cannot take a credit or other tax benefit for the same costs paid for by funds received as part of a paycheck protection loan. There are two payroll related tax incentives to consider in the short term.
- Employee Retention Credit – A refundable tax credit is allowed with the filing of payroll tax returns of eligible employers. The credit is equal to 50% of wages paid to certain employees after March 12, 2020 and before January 1, 2021. Wages are capped at $10,000 per employee, which means the maximum credit allowable is $5,000 per eligible employee. The credit is not available to employers receiving Small Business Interruption Loans.
- Deferral of Employer Payroll Taxes – This provision allows for the social security taxes of the employer to be deferred for up to two years for taxes incurred from March 27, 2020 through December 31, 2020. The employer portion of payroll taxes will be due in two installments. Half of the deferred tax will be due December 31, 2021, with the remaining half due December 31, 2022. This deferral does not apply if the wages were used to determine the amount forgiven under the Paycheck Protection Loans described above.
Step 4 – Contact Your Financial Team
Informed with the information above, it is now time to contact your bank and your CPA. This team will be critical in helping to navigate the process to make it through this crisis financially stable. Most importantly, stay safe and healthy!
Contributing author: Nicholas L. Shires, CPA is a tax partner at Dannible & McKee, LLP. Nick has over 19 years of experience providing tax and consulting services to a wide range of clients, including individuals and privately held companies. Feel free to contact us if you need help navigating through the CARES Act.