Posted by Jim McClaflin, EA, NTPI Fellow

Tribal Businesses Qualified for CARES Tax Credits / Loans

Tribal Businesses Qualified for CARES Tax Credits / Loans

The CARES (Coronavirus Aid, Relief, and Economic Security) Act establishes many major loan and tax exemption programs to help tribal-owned businesses stay afloat and retain their employees during health emergencies created by COVID-19. This article summarizes the main loan and tax reduction programs that tribal businesses can benefit from. Some of these programs cannot be used together, so be sure to review all of your options before taking advantage of any program.


Loan Programs

NOTE: As of the publication date, the Paycheck Protection Program (PPP) and Economic Injury Loan Program (EIDL) have reached their grant limits, and the Small Business Administration (SBA) is not accepting applications at the moment. However, federal law is likely to allocate additional funds to these programs.


Paycheck Protection Program

Title I of the CARES Act (Articles 1101-1109) establishes the PayCheck Protection Program (PPP) for qualifying companies, including tribal affairs, as a 100% temporary loan guarantee program in accordance with Section 7(a) of the Small Business Act. (SBA 7(a)) and allocated $350 billion. The PPP allows Tribal Business Issues to use the proceeds of the loan to pay for personnel costs, rent/mortgage/utilities, and interest on obligations due during the period covered from February 15th to December 31st, 2020. The loan amount can also be forgiven. The main goal of the PPP is to support employee retention. If a tribal corporation receives a PPP loan, it will not be eligible for the payroll tax credits available in other parts of the law.

The PPP explicitly includes tribal trade issues, which are defined as:

  • Owned by one or more Indian Tribal Governments or a company 100% owned by one or more Indian Tribal Governments if all other owners are US citizens or small businesses;

  • Wholly-owned by one or more indigenous tribal governments or a business that one or more indigenous tribal governments wholly own; or


Tribal Business Eligibility 

  • In operation on February 15th, 2020, with employees.

  • The size of the company is limited to 500 employees.

Tribal Business concerns will not be affiliated with Tribal Businesses or other tribal corporations (such as gambling companies) for eligibility and size. Tribal games, loans, cannabis, and other activities listed in section 120.110 of CFR 13 are not eligible for PPP.


Loan Amounts/Uses

The loan value is based on average monthly salary costs x 2.5 or $10 million, whichever is lower. The amounts of the loan will be reduced by the outstanding amounts of the EIDL loan.

Tribal business enterprises can use the loan proceeds to cover certain expenses incurred between February 15th, 2020, and December 31st, 2020. These expenses include:

  • Interest on debt securities

  • Payments for utilities

  • Rent/mortgage payments

  • Staff costs (salaries and benefits)

The SBA has issued interim rules requiring that at least 75% of loan proceeds be used for payroll costs.

 

Forgiveness/Deferment 

A Tribal Business Concern borrower is qualified for loan forgiveness for the following charges incurred within eight weeks of the loan payment date: staff costs, interest payments on any mortgage taken out before February 15th, 2020, payment of rent for any rental agreement in effect before February 15th, 2020, and payment to any concessionaire whose service began before February 15th, 2020. The discount amounts cannot exceed the principal amount of the loan. The forgiven amount will be decreased proportionally by any reduction in retained employees compared to the previous year and will be reduced by reducing the remuneration of any employee by more than 25% of the remuneration of the previous year.

 

Disaster Impact Economic Loan (EIDL)

The CARES Act also includes amendments and special provisions to the SBA EIDL program and has allocated $10 billion. The changes are typically designed to expand access to EIDLs and reduce its time to obtain funding. EIDLs are made directly by the SBA for no more than $2 million.

Some important updates to the program include:

  • It is not required to prove that the business has been in operation for at least one year before the date of applying, provided that the business is active before January 31st, 2020.

  • Major payments and interest on all new and existing EIDLs will automatically be deferred for the remainder of 2020.

  • No personal guarantee will be required for loans under $200,000.

  • No requirement to prove that the business was unable to obtain credit elsewhere.

  • The qualification criteria have been extended to include businesses with less than 500 employees, including tribal businesses (using the same definition for the PPP loan program).

  • The SBA can quickly advance up to $10,000 in EIDL earnings to an applicant within three days of receiving the SBA's application. If the SBA ultimately denies the claim, the claimant can withhold this $10,000 advance without repaying it.

  • The SBA will not require that the previous year's tax returns be included in the application. The CARES Act allows the SBA to approve EIDLs only based on the applicant's credit rating or "suitable alternative methods" to determine an applicant's ability to pay.


The economic stabilization loan fund

Title IV of the CARES Act created a $454 billion loan and loan guarantee fund for tribes, states, municipalities, and corporations in the United States. The Federal Reserve will administer the loan or loan guarantee. Section 4001 describes an "eligible business" as a corporation in the United States that has not benefited from an appropriate financial exemption in the form of loans or loan guarantees under this Act. This section also defines a "state" as one of several states, the District of Columbia, the territories and possessions of the US., and any Indian tribe. Tribal governments and tribal corporations are qualified lenders in this loan program.

All loan applications must meet the following criteria:

  • Borrowers should maintain existing employment levels as much as possible.

  • The duration of the loan will be as short as possible and will not exceed five years;

  • The loan is guaranteed or given at an interest rate that reflects the risk of the loan;

  • There is no reasonable availability of alternative financing;

Loans for medium-sized businesses, defined as 500-10,000 employees, will have access to a separate funding program from the Federal Reserve through banks and other creditors who will then provide direct loans to these medium-sized businesses. These loans will have subsidized rates, which will not exceed 2% per year on the direct loan, without principle, or interest is due for six months. As with the other programs of the project, a condition of participation in the medium market program is to maintain 90% of the beneficiary's pre-pandemic workforce until at least September 30th, 2020.

There are specific limitations for businesses that receive these loans.

  • Must agree not to buy shares and pay dividends during the term of the loan.

  • Do not revoke collective bargaining agreements; 

  • They must agree not to offshore jobs;

  • Remain neutral in collective bargaining efforts during the loan term and for at least two years after the loan term.

In addition, the company must commit to limiting the salaries of well-paid employees:

  • If they earned more than $425,000 per year in 2019, they could not increase their salary for 12 months; 

  • If they receive more than $3 million, they must limit their compensation to $3 million + 50% of any amount over $3 million in 12 months.

Any loan through a mechanism established by the Federal Reserve under this section must be complete, with verification that each participant is insolvent, unable to secure adequate funding elsewhere, and provides sufficient collateral. The Federal Reserve established the Main Street Loan Credit Facility to obtain and/or purchase loans under this title.

Loan forgiveness is not permitted under Title IV loan programs.

 

Tax Benefit Provisions

Delay of payment of employer payroll taxes

The provision enables all employers, including tribal governments, tribal-owned businesses, and the self-employed, to defer filing and paying the employer's share of the social security tax for which they are responsible for paying to the federal government from March 27th to the end of December 31st of 2020.

The provision also provides the payment of deferred taxes on wages for the next two years, with half of the requested amount to be paid by December 31st, 2021, and the other half by December 31st, 2022.

If a tribal corporation receives a PPP loan, it will not be able to defer taxes owed after the loan is forgiven.


Employment Retention Payroll Tax Credit

Allows qualified employers (including tribes, tribal-owned businesses, and tribal non-profit organizations) to receive a quarterly tax credit equal to 50% of qualifying salary, up to the first $10,000 in salaries with a credit limit of $5,000 per employee. To be eligible, a tribal business must:

  • Be "suspended in whole or in part during the calendar quarter due to orders from an appropriate government authority restricting commerce, travel or group meetings (for business, social, religious or other reasons)"

  • Experience at least a significant reduction in gross revenue of at least 50% in the same quarter last year.

  • Get involved in a business or trade activity, 

If an employer has less than hundred employees (on average), the eligible wages are the wages paid to all employees during the difficult period. If an employer has more than hundred employees, eligible wages are paid to employees who do not provide services (i.e., paid but not working).

The tax credit is completely refundable if the amount of the tax credit (taking into account other tax credits under the Family First Act) exceeds the tax payable. Additionally, an employer can defer paying the IRS its payroll tax rate before the payroll tax credit and can use the employer's tax rate to fund qualifying wages. Alternatively, the employer can apply for an advance loan from the IRS.

A tribal corporation cannot get this tax credit if it also applies for a PPP loan.

 

Title V - Stabilization fund

Creates an allotted $8 billion fund for tribal governments to cover major expenses incurred due to COVID-19. Funding amounts are based on the increase in spending by Tribal Governments and Tribal Businesses over total spending in the fiscal year 2019 aggregate expenditure. The increase in spending is determined by "necessary expenditure" made between March 1st, 2020 and December 30th, 2020, and "not counted" in the tribal or tribal business budget for 2020.


Note: Federal agencies involved in administering the programs and funds set out in the CARES Act are in the process of issuing guidelines for eligibility and how to access the assistance described above. Therefore, the information we provide is subject to change.


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Jim McClaflin, EA, NTPI Fellow
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