The Coronavirus Aid, Relief, and Economic Security (CARES) Act recently passed by Congress provides federal assistance to small businesses, including forgivable Paycheck Protection Program (PPP) loans, Economic Injury Disaster Loan (EIDL) emergency advances, and Small Business Administration (SBA) debt relief for certain business loans. The CARES Act also provides direct support to farmers and ranchers through the U.S. Department of Agriculture's Coronavirus Food Assistance Program (CFAP). Generally, an EIDL emergency advance, SBA debt relief payment, or forgivable PPP loan (whether or not forgiven) received by a business from these federal relief programs is not commercial activity and thus is not subject to the Corporate Activity Tax.
Similarly, direct support payments to farmers and ranchers issued under the Direct Assistance to Farmers component of the CFAP are generally not considered commercial activity. CAT taxpayers are allowed to subtract 35 percent of the greater of their cost inputs or their labor costs that are attributable to commercial activity. The amount of an EIDL emergency advance, PPP loan (forgiven or not), or CFAP direct assistance payment that is used to pay labor costs or cost inputs incurred over the year can be included in the taxpayer's costs eligible for the subtraction so long as those costs are attributable to commercial activity.
Eligible labor costs attributable to commercial activity may include vacation, personal leave, sick leave, family leave, and compensation to retain employees when the taxpayer's operations are closed or substantially curtailed due to the COVID-19 pandemic, if and to the extent those employees' duties are attributable to commercial activity but for the pandemic.
Please refer to our “How to Calculate CAT Liability" FAQ for further information on using the commercial activity ratio to apportion costs. For CAT taxpayers who elect to use the separate accounting method to determine costs eligible for subtraction, the amount of an EIDL emergency advance, CFAP direct assistance payment, or PPP loan (forgiven or not) used to pay labor costs or cost inputs may be included when calculating the 35 percent subtraction, if and to the extent those costs or cost inputs are attributable to commercial activity, including eligible labor costs as described above.