Key Considerations of the CARES Act for Manufacturers
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 27, 2020. 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.
Due to the pandemic, many manufacturers 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 manufacturers are having to ask themselves.
The CARES Act provides 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. While laying off employees may negatively affect a company’s unemployment rating, the additional Federal unemployment compensation to the employee should be considered. It is a potential win-win in the near term.
Tapping Into Funding
A key component of the CARES Act was a provision authorizing the Small Business Administration (SBA) to administer several loan programs for companies impacted by the Coronavirus pandemic. However, it was announced on April 16, 2020, that funds were no longer available for the Paycheck Protection Program and the Economic Injury Disaster Loan and Loan Advance Program, as the total funding authorized by the CARES Act had been reached. This rapid depletion left many closely held manufacturing companies without access to funds that are so desperately needed. The good news is that loan programs could be given additional funds in the near future, and when that happens, it is critical that manufacturing companies are prepared to tap into this funding as soon as it is made available again.
Business Tax Incentives
The CARES Act also included several business tax incentives for small businesses, including many manufacturing companies. As funds become available again for the two SBA loan programs, it is important to analyze whether the loan programs or the tax incentives would be more beneficial. In most cases, you cannot take a credit or other tax benefit for the same costs paid for by funds received as part of the Paycheck Protection Program. Until the SBA loan programs are provided with more funding, manufacturing companies should strongly consider the following business tax incentive programs that are part of the CARES Act:
- 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 Program.
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: Alex J. Nitka, CPA is a tax partner at Dannible & McKee, LLP. Alex has over 12 years of experience in all areas of income taxation, including individual and corporate tax planning, financial planning, multi-state taxation, research and development, New York State income tax credits and ownership transition issues. Feel free to contact us if you need help navigating through the CARES Act.