On March 18, 2020, the Families First Coronavirus Response Act (FFCRA) was signed into law. That same day, the IRS issued Notice 2020-18. The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, the most expensive legislation in United States history, was signed into law on March 27, 2020.
Some of the more publicized elements of these pieces of legislation are geared toward individuals, but significant portions of the legislation have a direct impact to businesses, including those in the real estate industry.
Beginning April 1, 2020, the FFCRA requires 80 hours of paid sick leave if employees are unable to work because they are quarantined, sick or caring for someone who is sick with the coronavirus.
If the employee is sick, leave must be paid at employee’s normal rate, subject to a maximum of $511 per day. If the employee is caring for someone else, leave must be paid at two-thirds of the employee’s normal rate, subject to a maximum of $200 per day.
The cost of the leave to the employer is fully offset by refundable payroll tax credits, claimed on quarterly payroll tax returns. Employers can also make a claim for an expedited refund. If complying with these provisions would cause a going concern to a company with less than 50 employees, that company could apply for an exemption.
Loans Available from the Government
There are two types of existing Small Business Administration (SBA) loans that have recently gained traction.
SBA Economic Injury Disaster Loans
An SBA Disaster Loan, sometimes referred to as an Economic Injury Disaster Loan (EIDL) or SBA 7(B)(2) loan, can be applied for by going directly to the SBA’s website and completing the application process. A company can apply for an EIDL when the governor designates its location as a disaster area and the company has been negatively impacted by the disaster. All states are now eligible to apply for assistance.
SBA 7(a) Loans
The CARES Act earmarked $350 billion of government funds for low-interest SBA 7(a) loans, making it one of the centerpieces of COVID-19-related legislation. These loans are obtained directly from lenders, not the government, and are available to small businesses (with fewer than 500 employees) that have been negatively impacted by COVID-19.
A key difference between this type of loan and the EIDL is that a portion of the SBA 7(a) loan is eligible to be forgiven if certain conditions are met. Those conditions include how the loan proceeds are spent (payroll, health benefits, interest, rent and utilities all qualify) and the level of workforce maintained. (The amount forgiven will be reduced if the company does not maintain the monthly average of full-time employees it had before the crisis began.)
Historically, investor-owned real estate has been excluded from qualifying for an SBA 7(a), as the program prohibits funds from being used for an investment property or any non-owner-occupied real estate. However, other real estate-related businesses, like real estate management, real estate agencies and real estate brokers, are otherwise eligible and can apply.
Because of the limitations surrounding the SBA 7(a) loans, many landlords, real estate investors and developers will likely not reap any benefits from this relief offering. Consideration instead should be given to applying for an EIDL.
However, landlords should encourage their tenants to apply for SBA 7(a) loans since one of the qualified uses of the loan proceeds is to pay rent. It’s also important to note that the CARES Act mandates that borrowers who receive EIDL related to COVID-19 for purposes of paying payroll are not eligible for an SBA 7(a) loan for the same purposes. Additionally, there is speculation that any business that applies for an EIDL after March 31st could taint its ability to apply for an SBA 7(a) loan thereafter.
A more detailed analysis of the SBA 7(a) and EIDL loan programs can be found here.
Qualified Improvement Property
When the Tax Cuts and Jobs Act was signed into law on December 22, 2017, a clerical error within the legislation proved to be detrimental to many real estate businesses. This glitch prevented Qualified Improvement Property (QIP) from qualifying for bonus depreciation.
QIP is defined as any improvement to the interior portion of a building that is treated a nonresidential real property, so long as the expenditures are not attributable to the enlargement of a building, elevators, escalators or the internal structural framework of a building.
Because of the glitch, these improvements had to be unfavorably depreciated over 39 years. The CARES Act retroactively fixes the glitch by correcting the depreciable life of QIP to 15 years and making the property eligible for bonus depreciation. Real estate companies with significant tenant improvements during this timeframe should consider amending their 2018 and/or 2019 tax returns to capture the benefits of this depreciation change.
Access More Information or Guidance
These major changes will have sweeping impact for individuals and businesses. More tax law changes will inevitably come before the pandemic is over. If you have questions or need assistance, please reach out to your Warren Averett advisor directly, or have a member of our team reach out to you.
This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor and also consult with your lender regarding your situation. Please note that Warren Averett is not an Agent under the Paycheck Protection Program loan program (“PPP”). Warren Averett does not provide loan packaging services or guarantee qualification under the PPP or any loan administered by the U.S. Small Business Administration 7(a) loan program.