Congress Passes CARES Act Stimulus Bill
CARES Act Programs May Assist Construction Contractors
Today, Congress passed the Coronavirus Air, Relief, and Economic Security Act (CARES Act), also referred to as the Coronavirus Phase 3 stimulus bill. The CARES Act contains provisions designed to aid small businesses, including construction contractors, during the Coronavirus pandemic. Following is a summary of key provisions that may assist construction contractors.
Aid to Small Businesses with Less Than 500 Employees
The CARES Act includes two programs intended to give small businesses the cash flow required to retain their employees through the worst of the coronavirus crisis rather than impose layoffs. The goal in doing this is to enable the businesses to not just survive, but to also recover quickly from the economic downturn associated with the pandemic when it ends. Under the CARES Act, eligible small businesses can choose either a new Paycheck Protection Program or a special payroll tax credit for employee retention.
Paycheck Protection Program
The Paycheck Protection Program will be operated through the Small Business Administration's (SBA) 7(a) loan program. The SBA will guarantee 100% of up to $349 billion in loans from private lenders to small businesses. The loans are to be forgiven on June 30 to the extent they are used to maintain employees on payroll, make rent or mortgage interest payments, pay utilities or insurance, or cover certain other costs during the eight-week period after the loan is obtained.
Under the measure, the amount forgiven would be reduced proportionally for a business that lays off employees compared to the same period last year, or that reduces the pay of any employee beyond 25% of their prior year compensation. Payroll may not include compensation for individuals earning more than $100,000 a year in salary or annualized wages. The program also encourages employers to rehire workers who were previously laid off.
SBA Paycheck Protection loans could be made for up to 250% of the employer's average monthly payroll, with a maximum loan of $10 million for an individual business and a top interest rate of 4%. Generally, only businesses with fewer than 500 employees would be eligible.
At the time of loan forgiveness, the SBA must purchase the amount forgiven from the lender. The amount forgiven may not exceed the principal of the loan. Loan amounts not forgiven after one year would be converted into a regular 10-year 7(a) loan with a maximum of 4% interest rate (although the loan would remain 100% guaranteed by the federal government).
Employee Retention Payroll Tax Credit
The CARES Act also creates a new, temporary employee retention tax credit on employer-paid Social Security payroll taxes for 2020 that businesses may use to help offset the costs of keeping employees on payroll during the pandemic. Small businesses that choose this tax credit would be eligible for a refundable payroll tax credit of 50% of wages that continue to be paid to employees during the coronavirus emergency if: 1) business operations have been fully or partially suspended due to a coronavirus-related shut-down order; or 2) the business's gross receipts declined by more than 50% compared to the same quarter during the prior year.
The credit would be provided on just the first $10,000 of compensation, including health benefits. For businesses with more than 100 full-time employees, the tax credit would be available for wages paid to employees who have been furloughed but who are still being paid, while businesses with 100 or fewer full-time employees would receive the credit on all employee wages, including those who are actively working.
Tax Law Changes to Help Businesses Increase Cash Flow
To aid business cash flows required to maintain operations and payroll, the CARES Act allows employers and self-employed individuals to defer payment of federal payroll taxes during calendar year 2020, and instead pay them over the next two years. Under this provision, half of the deferred payroll taxes will be paid by the end of 2021 and the other half by the end of 2022.
Additionally, for 2019 and 2020 the new law increases from 30% to 50% of taxable income the amount of loan interest that businesses may deduct as a business expense.
The CARES Act also revamps the loss limitation for pass-through businesses and sole proprietorships, allowing them to deduct excess business losses. It further allows businesses to use past corporate alternative minimum tax (AMT) credits at an accelerated rate, enabling companies to claim a refund immediately.
While the 2017 Tax Cut and Jobs Act repealed the AMT, it allowed businesses to retain corporate AMT credits that could be used as refundable credits over several years, ending in 2021.
Possible Aid from the Federal Reserve for Mid-Sized Businesses with 500 to 10,000 Employees
The CARES Act encourages the Treasury Department to work with the Federal Reserve to establish lending programs to support businesses and non-profit groups with between 500 and 10,000 employees that are too large to meet the eligibility requirement for SBA assistance to small businesses. We will have to await the creation of such a program by the Federal Reserve. Assuming it is created, the CARES Act mandates that loans issued through any such program would be limited to an annual interest rate of 2%, and borrowers would be able to defer repayments for up to six months. The CARES Act also sets several conditions for any such loans to midsize businesses. These conditions would include borrower certifications that it will:
1) Restore not less than 90 percent of the workforce of the recipient that existed as of February 1, 2020, and to restore all compensation and benefits to the workers of the recipient no later than 4 months after the termination date of the public health emergency declared by the Secretary of HHS on January 31, 15 2020;
2) Retain this workforce at full compensation and benefits through September 30, 2020; 2) will not buy back stock or pay dividends while the loan is outstanding;
3) Not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan;
4) Remain neutral in any union organizing effort made while the loan is outstanding; and
5) Not outsource jobs until two years after the loan's repayment.
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