Valuation considerations related to the CARES Act

The Coronavirus Aid, Relief and Economic Security (CARES) Act, H.R. 748, was enacted by Congress on March 27, 2020. Subsequently, interim guidance continues to be released by the Treasury and Small Business Administration (SBA). Presented below are FAQs which address questions arising in relation to business valuation, followed by a summary of four key CARES Act provisions with additional FAQs. The information provided below is not a substitute for the valuation analyst’s experience or professional judgement. Further research and analysis are recommended based on each client’s facts and circumstances.

The key provisions impacting business valuations includes the business tax provisions, Paycheck Protection. Emergency Economic Injury Grants (EEIG), Economic Injury Disaster Loans (EIDL) and the Small Business Debt Relief Program (SBDRP). The AICPA Coronavirus (COVID-19) Resource Center has additional resources addressing each of these provisions. The scope of the discussion below is limited to these provisions; for a broader discussion on the impacts of COVID-19 on valuation, visit the FVS Section COVID-19 Resource Page.

Key provisions of the CARES Act that impact business valuations

Business tax provisions

The business tax provisions are outlined in Section 2301-2308 of the CARES Act. The items most pertinent to valuations are summarized in the table below, showing the pre-CARES Act treatment per the Tax Cuts and Jobs Act (TCJA) and the CARES Act’s provisions.

Provision

TCJA

CARES Act
Employee Retention Credits 

Not Applicable 

Sec. 2301 of the CARES Act creates an employee retention credit for businesses that have temporarily closed due to COVID-19. Eligible employers are allowed a credit up to $5,000 per employee against employment taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. There are numerous limitations and qualifying conditions. 

Payroll Tax Delay 

Not Applicable 

Sec. 2302 of the CARES Act delays payment of 50% of 2020 employer payroll taxes until Dec. 31, 2021; the other 50% will be due Dec. 31, 2022. For self-employment taxes, 50% will not be due until those same dates. 

Net Operating Losses (NOLs)[1]

For tax years beginning after 2017, Sec. 172 disallows carryback of losses but allows an indefinite carryforward period, with losses limited to 80% of taxable income. 

Sec. 2303 of the CARES Act temporarily repeals the 80% income limitation for NOL deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).[2]

Excess Loss Limitations 

Sec. 461(l) disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly). 

Per Sec. 2304, the CARES Act temporarily repeals the excess loss limitation through 2020.[3]

Business Interest Limitation 

For tax years beginning after 2017, Sec. 163(j) disallows a deduction for business interest for any year to the extent that net business interest expense exceeds the sum of a taxpayer's business interest income, 30% of adjusted taxable income, plus floor plan financing interest. 

Per Sec. 2306, for tax years beginning in 2019 and 2020, Sec. 163(j) is amended to increase the adjusted taxable income percentage from 30% to 50%. Also, taxpayers can elect to use 2019 income in place of 2020 income for the computation. 

Bonus depreciation on QIP 

The TCJA created a new category of real property – qualified improvement property. All qualified improvement property defaulted to a 39-year cost recovery period and was not eligible for bonus depreciation. 

Sec. 2307 of the CARES Act makes technical corrections regarding qualified improvement property under Sec. 168 by making it 15-year property, fixing the so-called retail glitch introduced by the TCJA and making the property eligible for bonus depreciation. 

1. The IRS provided certain subsequent guidance in Revenue Procedure 2020-24.
2. Special carryback rules are provided for certain taxpayers such as real estate investment trusts (REITs) and life insurance companies.
3. Special rules apply to certain passive investors in pass-through entities.

Valuation considerations for the business tax provisions

Paycheck Protection Program

The Paycheck Protection Program (PPP) is designed to provide access to cash so that businesses can continue paying their employees and other specific expenses in accordance with the law, such as health insurance premiums, rent or mortgage interest and utilities. This important financial relief is intended to cover specific costs over an eight-week period.  The AICPA has dedicated a resource page for the PPP including detailed FAQs.

Valuation considerations for the PPP

Emergency Economic Injury Grant and Economic Injury Disaster Loan

Emergency Economic Injury Grants (EEIGs) provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three days of applying for an SBA Economic Injury Disaster Loan (EIDL). To access the advance, you first apply for an EIDL and then request the advance. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage.

EIDLs are lower interest loans of up to $2 million available to businesses, with principal and interest deferment at the Administrator’s discretion, that are available to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses.

To be eligible for the EIDL, a business must have been in operation since January 31, 2020 and meet the SBA size standards for a small business. In addition to an EIDL loan, a business owner may also apply for a PPP loan. If a business owner ultimately receives a PPP loan or refinances an EIDL loan into a PPP loan, any advance amount received under the EEIG program would be subtracted from the amount forgiven in the PPP.

Valuation considerations for the EEIG and EIDL

Small Business Debt Relief Program

The Small Business Debt Relief Program (SBDRP) assists borrowers with certain loans with the U.S. Small Business Administration (SBA).  Under the SBDRP, the SBA will pay six months of principal, interest and associated fees on behalf of borrowers with current, non-deferred 7(a) loans, 504 loans or Microloans, as well as, new 7(a), 504 or Microloans disbursed before September 27, 2020. For current and new loans, the SBA will pay the next (or first) six months payments. For deferred loans, the SBA will make the first six monthly payments after the deferment period.

Borrowers do not have to apply for the SBDRP as the SBA will automatically provide the assistance. In addition, the SBDRP has no impact on the borrower’s interest rate. Lastly, the SBDRP does not apply to Paycheck Protection Program loans or Economic Injury Disaster Loans.

Valuation considerations for the SBDRP

Disclaimer: This resource does not establish standards and is not a substitute for the original authoritative guidance. This document has not been approved, disapproved or otherwise acted on by an AICPA senior committee. It is provided with the understanding that the staff and publisher are not engaged in rendering legal, accounting or other professional services. All such information is provided without warranty of any kind. Practitioners are encouraged to have any engagement letters and reports used for the rendering of professional services reviewed by their legal counsel for suitability to the particular engagements performed.

Published by the AICPA CARES Act Valuation Impact Task Force

Lead Authors: Nathan DiNatale, CPA/ABV, Ethan Hitchcock, CPA/ABV, ASA, Shaun Maloney CPA/ABV/CFF/CEIV, CGMA, CFA, Thomas Reck, CPA/ABV/CFF, Maureen Rutecki, CPA/ABV/CFF, Josh Shilts, CPA/ABV/CFF, CGMA and Paul Wapner, CPA/ABV, CGMA