Coronavirus Aid. Relief, and Economic Security Act (Cares Act)

The purpose of this article is to assist small businesses in understanding the resources available for financing certain business continuing expenses as enacted under the Cares Act and in conjunction with the Small Business Administration and Keeping American Workers Paid and Employed Act.

In addition to providing a large cash infusion to hospitals and broader access to COVID-19 testing to individuals, the CARES Act aims to boost the economy with over $2 trillion in relief, ranging from individual rebates and small business loans to increased unemployment benefits and a wide variety of tax breaks. This article strictly explains the loan provisions under the Act.

Payroll Protection Loans

In a move designed to keep small businesses afloat, the CARES Act provides that businesses with fewer than 500 employees — including sole proprietors and nonprofits— will have access to nearly $350 billion in loans under Section 7 of the Small Business Act during the “covered period,” which runs from February 15, 2020 through June 30, 2020. The loans, which are referred to as “paycheck protection loans” and are fully guaranteed by the federal government through December 31, 2020 (returning to an 85% guarantee for loans greater than $150,000 after that date), are generally limited to the LESSER OF: the sum of:

1) average monthly “payroll costs” for the 1-year period ending on the date the loan was    made (an alternative calculation is available for seasonal employers) multiplied by 2.5, and

2) any disaster loan (discussed below) taken out after January 31, 2020, that has been refinanced into a paycheck protection loan, and up to a maximum $10,000,000.


Payroll costs, in turn, are the sum of the following:

Wages, commissions, salary, or other compensation to an employee or independent contractor                                                         

Payments for cash tips or equivalent

Payment for vacation, family medical leave or sick leave

Allowance for dismissal or separation

Payments for group health care benefits, including premiums

Payment of any retirement benefits

Payment of state or local taxes assessed on the compensation of employees

Payroll costs do not include:

Compensation of any individual in excess of an annual salary of $100,000,

Payroll taxes,( Employee social security and employee federal withholding), although an interpretation includes in the computation employer payroll taxes, FICA  and Medicare.

Any compensation of any employee whose principal place of residence is outside the USA or

Any qualified sick leave or family medical leave for which a credit is allowed under the New Coronavirus     Relief Act.

Example: Lou’s Pizza Restaurant applies for a paycheck loan on April 3, 2020. The business had for the twelve months ended March 31, 2020 payroll costs in the amount of $1,200,000 and a monthly average of $100,000 for the twelve months then ended. Lou can borrow the lesser of $250,000(2.5 times the monthly amount) or $10,000,000.  The loan will have a maximum maturity of 2 years and an interest rate not to exceed 4%, presently at 1%. The proceeds may be used to cover payroll, mortgage interest payments, rent, utilities and any other debt service requirements.

Loan Forgiveness

A separate section of the CARES Act calls for a portion of the paycheck protection loans to be forgiven on a tax-free basis. The amount to be forgiven is the sum of the following payments made by the borrower during the 8-week period beginning on the date of the loan:

payroll costs (as defined above)

mortgage interest, a mortgage on real or personal property incurred in the ordinary course of business prior to 02/15/2020

rent under a leasing agreement incurred prior to 02/15/20

certain utility payments for electricity, gas, water, transportation, telephone and water.

To seek forgiveness, a borrower must submit to the lender an application that includes documentation verifying the number of employees and pay rates, and canceled checks showing mortgage, rent, or utility payments. Payroll costs must be at least 75% of the above referenced total. The amounts forgiven will be considered debt cancellation and not includable in taxable income.

Example. Continuing the previous example with Lou’s Pizza Restaurant, in the first 8 weeks after the business borrows the $250,000, the business pays $200,000 in payroll costs, mortgage interest, and utility payments. Lou’s Pizza Restaurant is eligible to have $200,000 of the $250,000 loan forgiven. The forgiveness will not create taxable income. In addition, because of the deferment rules in the CARES Act, any payments due on the remaining $50,000 will not be due for six months.

There is a provision, however, that reduces the amount that may be forgiven if the employer either:

Reduces its workforce during the covered period, 02/15/20 to 06/30/20 when compared to the period 02/15/19 to 06/30/19, other rules apply if the business was not in business in 2019.  This reduction in  employees can be avoided, however, if the employer rehires or increases the employee’s pay within an allotted time period or,

Reduces the salary or wages paid to an employee who had earned less than $100,000 in annualized salary by more than 25% during the covered period.

Emergency Government Disaster Loan and Grant

The CARES Act also expands access to Economic Injury Disaster Loans under Section 7(b)(2) of the Small Business Act to include not only businesses with fewer than 500 employees, but also sole proprietors and ESOPs. For any loan made under this program before December 31, 2020, no personal guarantee will be required on loans below $200,000, maximum borrowing $2,000,000. The bill allows a disaster loan to be taken out between January 31, 2020 and the date on which a paycheck protection loan is available for reasons “other than paying payroll costs.” Presumably, any loan taken out for payroll purposes will be confined to the paycheck protection loans described above.

In addition, the Act creates a new Emergency Grant to allow a business that has applied for a disaster loan to get an immediate advance of up to $10,000. The advance can be used to maintain payroll, and is not required to be repaid, even if the borrower’s request for a 7(b) loan is denied. Interest rates for business 3.75% and non -profits 2.75%.

Subsidy for Certain Loan Payments

The CARES Act also provides benefits to those with loans under Section 7(a) of the Small Business Act OTHER THAN the new paycheck protection loans, in the form of a government subsidy whereby the SBA will pay six months of principal, interest and fees on qualifying loans.

About the Author: Salvatore Schibell, CPA, CFP®, MS Taxation, MBA, CGMA is the tax partner at Lawson, Rescinio, Schibell & Associates, P.C.  Sal may be contacted at 732-539-7328.