THE CARES ACT APRIL 24 2020 Donna M

THE CARES ACT APRIL 24, 2020 Donna M. Gonser, CPA dgonser@lumsdencpa. com

BRIEF HISTORY • March 13, 2020 - COVID-19 Emergency Declaration issued • March 27, 2020 - Coronavirus Aid, Relief, and Economic Security Act (CARES Act) legislation signed into law – $2 trillion package designed to provide financial relief to businesses, individuals, families, and nonprofits affected by COVID-19 pandemic • April 2, 2020 – SBA issued Interim Final Rule clarifying and changing the PPP loan program under CARES Act • April 6, 2020 – Most local lending institutions begin accepting PPP loan applications • April 14, 2020 – SBA issued Interim Final Rule for PPP loans for sole proprietors and independent contractor • April 23, 2020 – Congress approved additional $484 B relief package • Today – Many questions still unanswered; forgiveness guidance expected Mid-May The CARES Act 1

STIMULUS PROGRAMS • Loans – SBA Paycheck Protection Program (PPP) – SBA Economic Injury Disaster Loans (EIDL) and Emergency Grants – Main Street Lending Program (up to 10, 000 employees) • Employee Retention Payroll Tax Credits • Delay of Certain Payroll Tax Payments • Enhanced Unemployment Benefits The CARES Act 2

PPP LOANS CONTINUED • Loan Amounts – 2. 5 times payroll average monthly payroll costs for prior year, up to $10 million – Payroll costs, including compensation to employees (not in excess of $100, 000 annually); vacation; parental, family, or medical or sick leave; severance; employer paid group healthcare benefits (excluding owners); retirement (excluding owners); and state and local employment taxes (SUTA, possibly Workers’ Comp) – Sole proprietor compensation based on 2019 1040 Schedule C, line 31; capped at $100, 000 annualized – Partners in a partnership must apply at the partnership level to maximum $100, 000 annualized The CARES Act 3

PPP LOANS CONTINUED • Loan Terms – Six month deferment for interest and principal; interest will continue to accrue – 1% interest – Two year maturity – No collateral or personal guarantees required; other traditional SBA requirements waived The CARES Act 4

EIDL LOANS AND GRANTS • Expanded eligibility for EIDL loans; loan is not forgiven • Waives SBA program requirements such as personal guarantees (if below $200 k); a year of prior operations; and the ability to obtain credit elsewhere • Until 12/31/20, SBA can approve loans based solely on applicant’s credit score or other appropriate methods • Organizations with 500 or fewer employees are eligible • Able to apply for both EIDL and PPP but cannot use same expenses • $10 k emergency advance within 3 days; no repayment required; generally can be used for payroll costs, rent, debt payments • Emergency advance will offset loan forgiveness amount The CARES Act 5

LOAN FORGIVENESS – OVERVIEW • Provision within CARES Act, Section 1106, which allows forgiveness of up to the entire amount of PPP loans • Many unanswered questions; guidance expected Mid-May • Amount of forgiveness will depend on: Total amount of payroll costs Payments of interest on mortgage obligations incurred before 2/15/20 Rent payments on leases dated before 2/15/20 Utility payments under service agreements dated before 2/15/20 Over eight-week period following receipt of funds (the “covered period”) – Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs (payroll costs/. 75 = maximum forgiveness amount) – – – The CARES Act 6

LOAN FORGIVENESS – UTILITY COSTS • Utility payments under service agreements dated before 2/15/20 are includible in the forgiveness calculation and include: – – – Electricity Gas Water Transportation Telephone Internet access The CARES Act 7

LOAN FORGIVENESS – TREATMENT • Both principal and accrued interest are forgiven • Amounts will not be taxable income; unclear if covered expenses will be deductible • Based on expenses incurred and paid; unclear if cash or accrual basis but cannot prepay amounts The CARES Act 8

LOAN FORGIVENESS – REDUCTIONS • The amount of the loan that will be forgiven is limited by: – Reductions based on number of full-time equivalents – Reductions based on salary and wage amounts • To the extent that any FTE or salary and wage reductions are corrected by 6/30/20, the reduction calculations will not apply; this also needs clarification The CARES Act 9

LOAN FORGIVENESS – REDUCTION BASED ON FTEs • Calculated as follows: • Allowable costs = payroll, mortgage interest, rent, and utilities as previously defined • Average number of FTEs is determined by calculating the average number of FTEs for each pay period falling within a month • Covered period = eight-week period following receipt of loan • Elected period can be either: – – 2/15/19 – 6/30/19 1/1/20 – 2/29/20 Use lower number to maximize forgiveness Seasonal employees must use 2/15/19 – 6/30/19 The CARES Act 10

LOAN FORGIVENESS – REDUCTION BASED ON SALARIES AND WAGES • Loan forgiveness will be reduced by any reduction in wages that is greater than 25% – Compares wages during covered period to wages in most recent full quarter during which employee was employed before the covered period (likely 1/1/20 – 3/31/20) • Applies to wages of any employee who did not earn in excess of $100, 000 (or amount in a given pay period that would annualize in excess of $100, 000) in 2019 • No regulations yet, but current interpretation is that wages are reduced dollar for dollar by amounts in excess of 25% – Assume employee made $80, 000, salary reduced to $50, 000 – 75% of $80, 000 = $60, 000, so amount in excess is $10, 000 – Loan forgiveness would be reduced by $10, 000 The CARES Act 11

LOAN FORGIVENESS – HOW TO APPLY • An organization seeking loan forgiveness will submit to its lender: – Documentation verifying number of FTEs for the period selected (2/15/19 – 6/30/19 or 1/1/20 – 2/29/20) including: • Forms 941 • NYS-45 – Canceled checks, payment received, or other documents supporting claimed costs for mortgage interest, rent, and utilities – Certification that supporting documentation was accurate and loan was used to retain employees and cover approved costs • No later than 60 days after the date on which the lender receives an application for loan forgiveness, the lender shall issue a decision on the application; lender is held harmless • Administrator has 30 days from date of enactment of the CARES Act to issue guidance and regulations implementing this section (4/26/20 but SBA has indicated Mid-May) The CARES Act 12

TAX CREDITS AND DEFERRALS • Employee retention credit (Section 2301) – Provides a refundable payroll tax credit for certain wages paid to employees from March 13 to December 31, 2020 – Available to all employers with no size restriction – Not eligible if participating in PPP • Employer Payroll Tax Deferral (Section 2302) – Allows employers to defer deposit of certain employment taxes for as many as two years – Available to all employers with no size restriction – If participating in PPP and the loan is forgiven, become ineligible for deferral The CARES Act 13

EMPLOYEE RETENTION CREDIT • Payroll tax credit of up to $5, 000 per employee for eligible employers • Credit = 50% of qualified wages paid to employees during a quarter from March 13 to December 31, 2020, capped at $10, 000 • Claim credit by reducing federal tax deposit or by using Form 7200 Advance Payment of Employer Credits Due to COVID-19 • Eligible employers: – Must be carrying on a trade or business during 2020 and – During the calendar quarter: • Operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel, or group meetings due to COVID -19 OR • Gross receipts for the quarter were less than 50% of the gross receipts for the same calendar quarter in the prior year The CARES Act 14

EMPLOYEE RETENTION CREDIT CONTINUED • Qualifying wages: – Employers with > 100 average full time employees in 2019 – • Only wages paid to employees who are not working qualify for the credit – Employers with < 100 average full time employees in 2019 – • All wages paid, regardless of whether the employees are working – Based on the definition of wages used for FICA taxes + employer cost for health plan expenses – Cannot exceed the amount the employee was paid in the preceding 30 days – Specifically excludes federally mandated sick or child care leave paid under the Families First Coronavirus Response Act (FFCRA) The CARES Act 15

EMPLOYER PAYROLL TAX DEFERRAL • Allows employers to delay payment of employer social security taxes due from March 27 through December 31, 2020 • 50% of deferred amounts are due December 31, 2021 with the remainder due by December 31, 2022 • Self-employed individuals can take an equivalent tax deferral • Ultimate responsibility is on the employer, even if they contract with a payroll service provider or certified professional employer organization The CARES Act 16

UNEMPLOYMENT BENEFITS • Federal Pandemic Unemployment Compensation (FPUC) – Provides laid-off workers an extra $600 per week in addition to their state benefits for four months • Pandemic Unemployment Emergency Compensation (PUEC) – Provides additional 13 weeks (total of 39 weeks) • Pandemic Unemployment Assistance (PUA) – Furloughed, gig workers and free-lancers eligible for benefits The CARES Act 17

QUESTIONS