The Phase 3 coronavirus response legislation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is expected to be signed into law today. Yesterday, IADA shared NADA's guidance on the provisions in that legislation.(Let us know if you haven't seen that email.) The following information is an update to that guidance.
A key part of the legislation is the small business loan provision. While it is a business decision how much of a loan dealerships should apply for, much, if not all, of the loan could be forgiven, so dealers are highly incentivized to borrow as much as they can. Each business' borrowing power is determined by certain payroll-related expenses, with a cap of $10 million.
Any business with fewer than 500 employees that was in business on February 15 is eligible for this forgivable loan.
It's a low documentation loan, but you are going to need to provide documentation related to your payroll. We are awaiting on final guidance, but expect to provide documentation including:
- One year of payroll
- Employment taxes
- Employer's share of health insurance premiums
When and how much a business has to repay the loan is determined by a few factors, including the extent to which it was used on certain expenses during the eight-week period following the origination of the loan. Those expenses include payroll, rent, and payments made on mortgage indebtedness incurred before February 15, 2020.
To the extent dealerships use the loan for payroll, there is an annualized rate of pay cap of $100,000. That portion of compensation for any employee earning in excess of $100,000 annualized is not forgivable.
The loan is forgivable to the extent that your dealership maintains payroll, which is determined by both headcount and compensation. An employee's reduction in pay in excess of 25% will also impact forgivability.
Other Key Elements of the Loans
- Debt cancelled as a result of the forgiveness provisions will not be treated as income.
- Any portion of the loan that doesn't qualify for forgiveness will be repayable at 4% with a 10 year amortization.
The law has retroactive provisions relating to net operating loss carryback and capital expenditure expensing that might make it worthwhile to amend prior returns to secure a tax refund. Talk with your tax preparer to see how the provisions may impact your business.
Businesses are permitted to delay payment of the employer's portion of Social Security for the remainder of 2020, although they do still need to send in the employee's share. After January 1, 2021, the employer's share of Social Security from 2020 will be due in equal installments over the course of two years.