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December 18, 2023 | read

COVID-19: What Small Businesses Need To Know About The CARES Act

Brandon Hall

This article dives into the sections of the CARES Act that are most relevant and impactful for small business owners.

We created a special report summarizing the recent legislation. You can access it here.

We created a free Slack group, the Cash Flow Community, for real estate investors to brainstorm solutions. You can join the group here.

The Paycheck Protection Program and Economic Injury Disaster Loans

Please refer to this article for more information about these loans, eligibility requirements, and other technical details. If you’re concerned about covering necessary expenses over the Coronavirus crisis, you absolutely must read that article.

Foreclosure Moratorium and Consumer Right to Request Forbearance

During the covered period, a borrower with a Federally backed mortgage loan experiencing a financial hardship due directly or indirectly to COVID-19 may request forbearance on the Federally backed loan regardless of delinquency status. 

Requests must be submitted in writing to the loan servicer affirming that the borrower is experiencing financial hardship during the COVID-19 pandemic. Upon submission of request for forbearance, the forbearance shall be granted for up to 180 days and can be extended for an additional 180 days. 

The servicer needs nothing other than the borrower’s attestation of financial hardship in order to grant the forbearance of the loan. 

During the period of forbearance, no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract, will accrue on the borrower’s account.

Foreclosures cannot be initiated or executed for 60 days beginning March 18, 2020.

Employee Retention Tax Credit

Eligible employers who retain employees during the pandemic will be eligible for a refundable payroll tax credit equal to 50% of the qualified wages paid to employees. This 50% credit will offset the employer’s share of Social Security taxes up to $10,000 per employee. 

An eligible employer is any employer carrying on a trade or business during 2020 and with respect to any calendar quarter for which (1) the business operations were partially or fully suspended due to the orders from a government authority limiting commerce, travel, or group meetings, or (2) the business experienced a significant decline in gross receipts defined as a calendar quarter’s gross receipts being less than 50% of the prior year’s calendar quarter’s gross receipts.

For employers with more than 100 full-time employees, qualified wages are wages paid when they are not providing services due to the COVID-19. 

For eligible employers with fewer than 100 full-time employees, all employee wages qualify for the credit.

Net Operating Losses

Prior to the 2017 TCJA, NOLs could be carried back two years and carried forward indefinitely. After the 2017 TCJA amended IRC Sec 172, NOLs could not be carried back and the carry forward was limited to 80% of taxable income. 

The Act has struck the 80% taxable income limitation for any NOL arising before January 1, 2021. Additionally, for NOLs arising in 2018, 2019, or 2020, taxpayers can carryback the NOL five years.

The election to carry back an NOL must be made by the due date, including extensions, of the taxpayer’s 2020 tax return. 

Lastly, there is a temporary removal of excess business losses under IRC Sec 461(l) which was added as part of the 2017 TCJA. This section provides that the amount of net business loss an individual may use to offset other, non-business sources of income is capped at $250,000 (if single and $500,000 if married filing jointly). Any excess loss is converted into a net operating loss. 

The removal of Sec 461(l) is retroactive to 2018 and will be re-implemented in 2021. When this section kicks back in during 2021, wages will no longer be considered “business income.”

Planning considerations for real estate investors: Excess business losses as described in IRC Sec 461 limited the amount of non-passive rental losses qualifying investors could claim against their other income. Any excess business loss was considered to be a Sec 172 NOL and subject to the 2017 TCJA amendments to Sec 172. 

With the passage of this Act, Sec 172 now allows NOLs to be carried back five years. If your rental losses on your 2018 or 2019 tax return resulted in an excess business loss that you were forced to carry forward, contact our team to go over your options of applying the NOL to previously filed tax returns. This will result in an immediate refund to you.