A significant number of companies could be excluded from the $ 2.3 trillion business loan program created by Congress and administered by the Treasury and the Federal Reserve.
The last law of economic aid (Public law 116-136) authorizes the Fed to provide low-interest loans to various companies. But due to a loophole in the law, some businesses organized as S corporations may be excluded from access to this aid, underscoring the political tightrope that the Trump administration and Congress must walk to make aid available to people. large employers while ensuring that these funds are not abused. .
Companies receiving assistance under the program must agree to “not pay dividends or make other distributions of capital with respect to the common shares of the qualifying company.” Congress drafted the provision to prevent companies that receive aid from repurchasing shares or providing other compensation to shareholders.
Share buybacks and dividends for companies asking for federal help to keep operating are seen as politically unpleasant.
But some S corporations – flow-through entities that have fewer than 100 shareholders and can vary widely in terms of turnover and number of employees – make regular payments to cover their shareholders’ income tax payments. This has raised fears that these companies may be excluded from aid, and they are already making their fears known.
“These owners are going to have to pay taxes on the business if it is profitable whether or not the S corp is making payments,” said Brian Reardon, president of the S Corporation Association.
A question of interpretation
Reardon wrote to the Treasury earlier this month to request that the program’s eligibility conditions include an exception for companies that have a contractual agreement to pay shareholders on a quarterly basis. Reardon argued that companies are doing this in order to allow homeowners to pay taxes quarterly.
“In many cases, these distributions are required under the Company S ownership agreement,” Reardon wrote.
Reardon argues the Treasury could unilaterally create the exception, but he told Bloomberg Tax the department has yet to say whether it will.
The extent of the impact of this exclusion remains unclear, as the exact number of companies affected by the limitation depends on the contractual payment arrangement between an S corporation and its shareholders. Reardon said he would exclude most S corporations, some of which are also too big for the Stimulus Act paycheck protection program that offers forgivable loans to small businesses.
An October 2019 EY report commissioned by the S Corporation Association estimated that the S corps of more than 100 employed around 13.1 million people in 2016.
Several trade associations, including the S Corporation Association, the National Federation of Independent Businesses, Builders and Associate Contractors, and Independent Community Bankers of America, have called on Congress to intervene. On April 16, the group of associations, under the heading Parity for Main Street Employers, wrote to legislators asking them to lend their voice to the choir asking the Treasury for a change.
“Many of these businesses have been closed due to the health response to COVID-19 – their doors are closed and their workers are inactive,” the coalition wrote. “The loans offered under the Main Street Loan Facilities could provide them with a lifeline, but only if the rules are adjusted to allow them to pay their taxes without violating the terms of the loan. “
Representative Warren Davidson (R-Ohio), a member of the House Financial Services Committee, has agreed to lead a letter from Congress asking the Treasury to make the change requested by these companies.
Lawmakers could vote as early as this week on another relief plan, with negotiations focused on replenishing the small business lending program and providing additional funds to hospitals. But the political backlash against parts of the previous relief law potentially makes legislative efforts to change eligibility potentially difficult.
Representative Lloyd Doggett (D-Texas) and Senator Sheldon Whitehouse (DR.I.) are among Democratic lawmakers who have criticized the Emergency Aid Act for temporarily rescinding the limit in the 2017 tax law on the ‘use of net operating losses as tax breaks. They argue that this provision will mainly benefit the wealthier people, many of whom derive their money from flow-through entities – the category of private enterprises so called because their income is passed on to the owners, who report it as personal income.
The recent backlash with franchised restaurant chains like Ruth’s Chris and Shake Shack receiving relief funds through the separate but related paycheck protection program only makes the situation more delicate.
“I am 100% convinced that they have the power to do it and I am reasonably confident that they will fix this problem,” he said. “There’s no reason they can’t.”