Bulletin #3: Tax Considerations Involved With the Cares Act

This is the third bulletin provided by Vernon Litigation Group to support local small business owners and help navigate VLG Logothe challenges of staying in business, supporting employees and clients, supporting the community, and positioning the business for growth and success on the other side of the COVID-19 crisis.

As we discussed in our previous bulletin, the federal government recently passed the CARES Act (administered by the Small Business Administration), which offers provisions to include cash grants, low-interest loans, and stimulus payments to help offset eight weeks of payroll costs for small businesses that retain employees or rehire those that have been laid off.

This bulletin highlights some tax considerations involved with the CARES Act, with a specific focus on the Paycheck Protection Program, a separate section of the CARES Act.  Small business may have questions about the federal income tax treatment of loan forgiveness, and generally (unless an exception exists), the forgiveness of indebtedness typically results in taxable income, a reduction in tax attributes, or both.  However, the forgiveness of all or a portion of a loan under the Paycheck Protection Program will be excluded from the gross income of the small business borrower.  Therefore, the amount of the loan that is forgiven is not included in the gross income of the small business borrower for federal income tax purposes.  Furthermore, the tax treatment of Paycheck Protection Program loans will be treated as indebtedness for federal income tax purposes, and any interest paid or accrued on such loans may be deductible by the small business borrower.

The Small Business Administration may forgive loans under the Paycheck Protection Program provided that three requirements are met by the small business borrower:

(1) the Paycheck Protection Loans are used exclusively for their intended purposes;

(2) the Paycheck Protection Loans are used to offset no more than eight weeks of eligible payroll expenses,

(3) the small business retains (or rehires them by June 30, 2020) its employees at salary levels comparable to before the COVID-19 crisis.  The amount to be forgiven under the Paycheck Protection Program include the sum of the following payments made by the small business borrower (during the eight-week period): payroll costs, applicable mortgage interest/rent, and certain utility payments.  To seek forgiveness, a small business borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, documents showing mortgage/rent, and utility payments.

Small business borrowers should also consider, if a small business claims a loan under the Paycheck Protection Program, it may not be eligible for the Employee Retention Credit (which provides a refundable payroll tax credit for fifty percent of qualified wages paid by eligible employers to certain employees during the COVID-19 crisis) or for the deferment of payment of the small businesses payroll taxes.

Given the foregoing, the small business should do its due diligence and consider its options to make informed business decisions based on what makes the most sense for its unique situation and circumstances.  If you have any questions or require further assistance to help you navigate through these difficult times, please feel free to give us a call.  We are all in this together.

Vernon Litigation Group represents businesses & individuals throughout the United States who have financial disputes, including cyber litigation, securities litigation & arbitration, business & commercial litigation, financial advisors & employment disputes and FINRA arbitration. For more information contact, Brooke Sandoval-Banker bsandovalbanker@vernonlitigation.com or call (239) 319-4434.

To download a copy, please follow the link: bulletin-3.pdf

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