Featured, COVID-19 Resources & Updates

COVID-19 and small business, part III: The CARES Act – what it means for small business

Part III: COVID-19 Small Business Series

As addressed in earlier installments to this series, Congress and the current administration have worked diligently, and somewhat frantically, to address the serious economic burdens associated with the Coronavirus pandemic.  In addition to the obvious health concerns and ongoing overload of the healthcare system, businesses, large and small, and their employees face incredibly difficult economic uncertainties resulting from this crisis.  In the first two installments we focused on (1) the tax breaks and incentives provided in the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020, and then (2) the relaxed guidelines previously provided by the United States Small Business Administration (SBA).  As a follow-up to those measures, on March 27, 2020, the House of Representatives passed the largest economic bill in United States history, less than 48 hours after the Senate unanimously approved the legislation.  A few hours later, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law.  This piece will highlight portions of the CARES Act that might be of the greatest interest to small business owners facing uncertain times.

The Paycheck Protection Program

Through an allocation of $349 billion, the CARES Act creates a new type of loan for the SBA to administer – the Paycheck Protection Program (“PPP”). Unlike the previously discussed disaster loans available through the SBA (“EIDLs”), the PPP loans are potentially forgivable up to 100% of the principal amount borrowed if used for payroll, utilites, rent or debt service.  Additionally, the PPP loans are not tied directly to establishing losses suffered during the national disaster – there is a presumption of negative impact from COVID-19.  The PPP loans do not require collateral or guarantees, meaning the other eligibility requirements of SBA loan participation (e.g., average annual receipts) are not applicable, and this program is available (i) to many new businesses previously unable to qualify for SBA loan programs with (ii) much friendlier terms than traditional SBA loan programs.  Applications were supposed to be available on April 3, 2020 but the SBA was still working on the operative rules/guidelines and then the SBA approved lenders need to digest those rules and make sure they work within their internal credit system.


All businesses, nonprofits, and veterans’ organizations and tribunal concerns with less than 500 employees are eligible (unless the applicable industry has a higher size standard under SBA rules).  Certain businesses (such as food services and accommodation) with more than 500 employees are eligible if they have no more than 500 employees at each physical location.  Importantly, the loan program is even available to sole proprietors, independent contractors, and self-employed individuals, although these classifications are subject to certain additional requirements.  In calculating the number of employees, businesses are generally required to include the employees of all affiliates, but the CARES Act waives the strict SBA affiliation rules for this new loan for: (i) businesses with no more than 500 employees that are assigned a NAICS code beginning with 72; (ii) businesses operating as a franchise that are assigned a franchise identifier code by the SBA; and (iii) businesses that receive financial assistance from a company licensed under section 301 of the Small Business Investment Act. Businesses not provided a waiver to the SBA affiliation rules by the CARES Act would need to determine if a waiver under existing law applies.

Amount of Loan

Generally, the amount of the loan is capped at the lesser of $10 million and 2.5 times the average monthly payroll costs incurred in the one-year period before the date of the loan. Payroll costs include salary, wages, and tips; sick leave, family leave, and paid time off; severance payments, group health benefits (including insurance premiums), retirement benefits, and state or local taxes assessed on employee compensation.  Importantly, for any employee who is paid a salary of more than $100,000, only the amount up to $100,000 (prorated for the covered period) can be calculated into the number.  A link at the end of this article provides resources to three different calculators (depending on a seasonal versus non-seasonal business, and whether the seasonal business is currently in season) to help determine the amount of PPP loan your business may borrow.

Terms of Loan

An eligible borrower is only eligible for one covered PPP loan (although a business may have a PPP and an EIDL loan).  The loan proceeds may be used for: payroll costs; continuation of group health care benefits during periods of paid sick, medical, or family leave, or insurance premiums; salaries or commissions or similar compensation; interest on mortgage obligations; rent; utilities; and interest on other outstanding debt.  Under the CARES Act, the terms of the amount of any portion of the loan that is not forgiven (as discussed below) will be for a term not to exceed 10 years and at an interest rate of no more than 4%.  The SBA recently announced, however, that all loans under this program (subject to forgiveness discussed below) will have the following identical features: an interest rate of 1.0% (announced April 2, 2020, revising previous guidance which stated 0.5%); a maturity of two (2) years; the first payment deferred for six (6) months; a 100% guarantee by SBA; no collateral required; no personal guarantees; and no borrower or lender fees payable to SBA.


The amount of the loan that is forgivable is the sum of the payroll costs, mortgage interest payment, rent, and utilities incurred or paid by the borrower during the 8-week period beginning on the loan origination date.  In addition, any portion of the loan that is forgiven is excluded from taxable income. If the recipient of the loan laid off employees or reduced wages/salaries of its workforce in the period between February 15, 2020 and June 30, 2020, the amount of forgiveness is reduced proportionally by (i) any reduction in employees retained compared to historical levels, and (ii) the decrease in pay of any employee beyond 25% of their historical compensation.  It is important to note, however, that furloughs would necessarily impact this loan forgiveness analysis as well. To encourage workforce stabilization, the CARES Act takes into account that many businesses might already have or are planning to lay off personnel or cut salaries.  If those changes were made between February 15, 2020 and April 26, 2020, those changes are not counted if the business rehires the number of personnel or returns the adjusted salary, as applicable, by June 30, 2020.

Other Related Assistance

The CARES Act also creates a new grant program under the SBA’s Office of Disaster Assistance to provide quick relief for applications awaiting processing of SBA Economic Injury Disaster Loans (“EIDL”).  Loan applicants can get up to $10,000 to cover immediate payroll, mortgage, rent, and other specified expenses, and this grant does not have to be repaid.  A business that receives an EIDL can apply for, or refinance its EIDL into, the forgivable loan product.  In addition, lenders on existing SBA backed loans are encouraged to provide payment deferments and extend maturity dates to avoid balloon payment or requirements that would increase debt as a result of deferment.  The SBA will reimburse lenders the deferred principal and interest for a defined period.

Starting no later than thirty (30) days after the date on which the first payment is due, the SBA will pay all principal, interest, and fees on existing SBA loans for six (6) months pursuant to 7(a), Community Advantage, 504, and Microloan programs. If the loan is currently in deferment, then the SBA will begin making payments after the deferment period. Borrowers who obtain new loans under those programs within six months after the enactment of the CARES Act are also entitled to have the SBA make a full 6 months of loan payments. These provisions of the CARES Act do not apply to loans under the new Paycheck Protection Program. The SBA is directed to promulgate implementing regulations within fifteen (15) days of enactment of the CARES Act.

Additional Business Tax Relief

The CARES Act also modifies the rules related to net operating losses (“NOLs”), interest expense deductions, alternative minimum tax credits and trade or business losses of non-corporate taxpayers.  Many of these modifications are designed to provide critical cash flow and liquidity to businesses during the COVID-19 emergency, including through amending prior tax returns to obtain tax refunds.  This means employers have several tools available to them to help with cash flow, claim tax refunds, or reduce upcoming tax payments.

Employee Retention Credits

Under the CARES Act, employers may be eligible for a refundable tax credit for the employer’s share of the 6.2% Social Security tax (the “SSI Tax Credit”). The potential SSI Tax Credit is for 50% of the first $10,000 in qualified wages (including health plan expenses) paid to each employee commencing on March 13, 2020. To be eligible, an employer must (a) have had operations fully or partially suspended because of a shut-down order from a governmental authority related to COVID-19, or (b) have had gross receipts decline by more than 50% in a calendar quarter when compared to the same quarter in 2019 (and will remain eligible until the earlier of (i) gross receipts exceeding 80% relative to the same quarter in the prior year, or (ii) December 31, 2020).  For employers with more than 100 employees (based on 2019 employment levels), qualified wages are limited to wages paid to employees who were not providing services due to the COVID-19 crisis.  Please note, however, that the SSI Tax Credit is not available if the employer receives a covered loan from the SBA, as discussed above under the PPP Loan Program.

Payroll Tax Deferral

In addition to potentially receiving the SSI Tax Credit, the CARES Act allows employers to defer the payment of the employer’s share of the 6.2% Social Security tax on wages paid beginning on March 27, 2020 and ending on December 31, 2020. A corresponding deferral is also permitted for the equivalent portion of self-employment taxes. The deferred amounts are payable in two installments, with 50% of such taxes being due on December 31, 2021, and the remainder due on December 31, 2022. This deferral of Social Security taxes is not, however, allowed where the employer has had a covered loan forgiven, as discussed above under Forgivable SBA Loan Program.

Net Operating Losses (NOLs)

The 2017 tax reform bill changed the treatment of NOLs, but the CARES Act relaxes these limitations on a corporation’s use of NOLs. The CARES Act allows businesses to carry back NOLs incurred in 2018, 2019, and 2020 for five years (excluding offset to untaxed foreign earnings transition tax).  Previously, these NOLs could only be carried forward. This could be significant for businesses that have the ability to carry back NOLs to offset income that was taxed at 35% before 2017 tax reform.  In addition, for taxable years beginning prior to January 1, 2021, taxpayers can offset 100% of taxable income with NOL carryovers and carrybacks (instead of limiting such offsets to 80% of taxable income).  If there are refunds available by operation of these new rules, corporations can use the IRS’s quick refund procedures (Form 1139) to claim the refund.

Business Interest Deductions

The 2017 tax reform bill also introduced new IRC Section 163(j), which generally limits the amount of interest that can be deducted by most taxpayers in a taxable year to 30% of the “adjusted taxable income” (ATI) of such taxpayer for such taxable year. For tax years before 2022, ATI is computed in a manner similar to EBITDA.  For the 2019 and 2020 tax years, taxpayers may elect to increase this limit on allowable business interest deduction from 30% to 50% of adjusted taxable income (“ATI”).  In addition, taxpayers can elect to use their ATI in 2019 in place of their 2020 ATI for purposes of determining the deductibility of their business interest expense for 2020, which could increase the business interest deduction.  Partnerships are subject to special requirements, and this provision is intended to allow businesses to increase liquidity with a reduced cost of capital, so that the businesses are able to continue operations and keep employees on payroll.


The CARES Act provides a number of other relief provisions aimed at individuals, from relaxed rules on certain qualified retirement plan distributions to student loan relief, unemployment compensation benefits, and the “recovery rebate” of up to $1,200 for certain qualified taxpayers, and a variety of others that are beyond the scope of this publication.  While this piece has focused on those portions of the CARES Act most beneficial to small business, anyone suffering from this crisis should seek guidance to determine what new options or incentives might be available.   Many agencies, especially the SBA, are still scrambling to promulgate necessary implementation regulations, and lenders under those programs are still in “wait-and-see” mode.  The CARES Act touches a number of governmental programs, federal agencies, and private institutions alike, and the requirements and information will continue to change as the SBA and other agencies grapple with the changed dynamic and work on regulations and documentation requirements.  All of which means a little patience will be required as we all hunker down and work together to continue to get through this crisis, but this is the best information available as of today.

For more information, developments, and resources, please visit: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

To view the various PPP Loan calculators, please visit: https://www.aicpa.org/interestareas/privatecompaniespracticesection/qualityservicesdelivery/sba-paycheck-protection-program-resources-for-cpas.html

To review the most recent PPP loan application and/or apply for a PPP Loan (this site will be updated with the latest version), please visit: https://www.sba.gov/document/sba-form–paycheck-protection-program-borrower-application-form

This post has been prepared by Robinson Gray Stepp & Laffitte, LLC for informational purposes only and does not constitute legal advice. For more information, contact attorney Tim Thompson.