Small Business Accounting Advice

What the CARES Act Means for Your Business

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, is a $2 trillion stimulus bill that was signed on March 27. This historic government funding dwarfs the two rescue packages from the Great Recession. It is aimed at supporting large and small businesses, industries, individuals, families, gig workers, independent contractors, and hospitals. But, its hefty price tag, quick signing, and less than stellar rollout have left many individuals and businesses wondering how it will relieve their burdens.

1. Paycheck Protection and Loan Forgiveness

The Paycheck Protection Program offers guaranteed loans of up to 250 percent your monthly payroll average, based on your previous year’s numbers. This loan is designed to allow you to continue to pay your workers during these difficult times. If your business is eligible, you can obtain this loan anytime between February 15 and June 30.

The portion of the Payment Protection loan spent on payroll, rent, mortgage, interest, or utilities is also forgivable by the SBA as long as all employees are kept on the payroll for eight weeks. Any portion of the loan that is unforgivable will be treated as a two-year loan with a 1% interest rate. However, payments on this amount will be deferred for 6 months. While the current Paycheck Protection Program funds have been accounted for and are set for distribution, Congress is working diligently to provide additional funds to continue offering the program to assist businesses.

2. Unemployment Benefits

Unemployment benefits are also being extended. Individuals that can qualify for unemployment now include those diagnosed with COVID-19, have a household member with the disease, are caring for someone with the disease, or are quarantined due to the disease. It also applies to individuals who cannot go to work due to coronavirus, is unable to begin their job, has become a widower of someone who was diagnosed with coronavirus and was the primary money maker, someone who quit due to coronavirus, and if your business closed. In addition, gig workers and self-employed workers are also covered under the CARES Act.

3. Penalty-Free 401(k) Withdrawals

Typically, if you’re younger than 59 1/2, the IRS slaps you with a 10% penalty when you withdraw money from your 401(k). But under the CARES Act, you can withdraw up to $100,000 penalty-free during the 2020 fiscal year to ease financial hardships caused by the coronavirus.

Withdrawal will still be subject to your ordinary income tax rate, but instead of paying the lump sum this year, you can disburse payments over a three-year term.

4. Employee Retention Credit

To encourage businesses to keep employees on their payroll during the slowdown, the IRS is offering a refundable 50% tax credit of up to $10,000 in wages paid by an eligible employer.

An eligible employer is defined by a business that is temporarily suspended in any form due to coronavirus, or that is making less than half its average revenue.

Employers can immediately claim the tax credit by withholding taxes that they would otherwise deposit each quarter. If credits exceed their tax liability, then employers can file a Form 7200 to receive an advance refund.

5. Employer Payroll Tax Delays

Ordinarily, business owners collect 6.2% of their employees’ wages for Social Security Tax and then match their contribution dollar for dollar. But the CARES Act allows employers to delay paying their portion of payroll tax in full until December 31, 2022, with at least 50% being due by December 31, 2021.

It is important to note that all businesses are approved for the deferral, but if you receive a loan under the SBA’s Paycheck Protection Program, you will not be eligible.

6. Paid Leave

Under the Families First Coronavirus Response Act, businesses with fewer than 500 employees will receive tax credits for the cost of providing paid leave to employees if taken for specified reasons related to COVID-19.

The tax credit will reimburse employers for 100% of the employee’s salary and health insurance costs. Employers will also face no payroll tax liability for the paid leave.

Final Thoughts

Don’t try to navigate these muggy waters all by yourself. Working with a tax and accounting expert is the best way to make sure you take advantage of the new stimulus package. If you have additional questions regarding the CARES Act, we recommend you visit the IRS’s page for Business Tax Relief