On Friday March 27, 2020, the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) or “CARES Act,” providing about $2 trillion to individuals, businesses, and states, among others, in response to the coronavirus pandemic.

This Client Alert discusses some of the small business bridge loan provisions, tax relief provisions and financial support provisions for businesses that are contained in the CARES Act. 


Paycheck Protection Program of the Small Business Act

Generally, the CARES Act increases eligibility to obtain loans to include, in addition to small business concerns, any business concern, nonprofit organization, veterans organization, or certain tribal business concerns with no more than 500 employees (unless SBA rules allow a greater number) that were in operation on February 15, 2020.  During the covered period, loans made under this program may be used for payroll costs, some costs of group health care benefits, some payments of interest on debt, rent, and utilities.

Note: Eligibility is extended to sole proprietors, independent contractors and eligible self-employed individuals.  Special rules apply to business concerns with more than one physical location and to business concerns subject to the affiliation rules under section 121.103 of title 13, CFR.

The Paycheck Protection Program covers loans between February 15, 2020 and June 30, 2020 guaranteed by SBA. The maximum loan amount is the lesser of:

  • Average total monthly payments by the applicant for payroll costs incurred in the one-year period prior to the date of the loan (with adjustments for seasonal employers and those in business less than a year) multiplied by 2.5; plus the outstanding amount of a loan under the SBA that was made on or after January 31, 2020 and is to be refinanced under this program; or
  • $10,000,000.

Note: For purposes of the program, “payroll costs” do not include the compensation of an individual employee in excess of an annual salary of $100,000 (as prorated for the covered period), employees who reside outside the United States, and qualified sick leave and qualified family leave paid under the Families First Coronavirus Response Act.

Loans made under this program will be unsecured, with no requirement for personal guarantees, and payments of principal and interest will be deferred for between six months and one year.

The borrower is eligible for forgiveness of indebtedness on this loan in an amount equal to payroll costs, certain interest on debt, rent and utilities incurred during the eight weeks following loan origination (not to exceed the principal amount), subject to reduction if the business reduces the number of employees or the salary or wages of employees during the eight weeks following origination of the loan.  However, if the reduction in employees and/or wages and compensation occurred between February 15, 2020 and April 26, 2020, this reduction will be disregarded with respect to debt forgiveness, so long as such reduction in the number of employees and/or compensation is eliminated by June 30, 2020.  Debt forgiveness will be obtained through an application to the lender and is not includible in gross income.

To streamline the processing of covered loans under this program, the CARES Act gives qualified lenders the authority to make and approve loans.

The SBA is required to issue regulations on the implementation of this program by April 11, 2020.

Here is a document produced by the U.S. Senate Committee on Small Business Entrepreneurship with frequently asked questions regarding this program: Paycheck Protection Program FAQs for Small Businesses



Employee retention credit

The CARES Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees. The credit is not available to employers receiving loans under the paycheck protection program described above.

Eligible employers
The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
Applicable employee wages for credit
For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is currently providing services. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are not currently providing services or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit.
No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit (IRS Code Sec. 21) with respect to the employee.
Wages taken into account
The first $10,000 in wages (including health benefits) paid to an eligible employee after March 12, 2020 and before January 1, 2021, excluding credits and paid leave under the Families First Coronavirus Act and wages taken into account for the IRS Code Sec. 45S employer credit.
IRS authority
The IRS may advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.

Delay of payment of employer payroll taxes

Generally, effective immediately, the CARES Act allows employers to defer paying the employer portion of certain payroll taxes through the end of 2020. Payment of these deferred employment taxes will be due by (1) December 31, 2021with respect to the first 50% and (2) December 31, 2022, with respect to the remaining 50% of those amounts.  An employer will be treated as having timely made all deposits of applicable employment taxes which would otherwise be required to be made this year, if all such deposits are made not later than these applicable dates.  These rules won't apply to any taxpayer which has had indebtedness forgiven under the payroll protection program of the CARES Act described above. 

Temporary repeal of taxable income limitation for net operating losses (NOLs)

The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income and applies to tax years beginning after December 31, 2017, and to tax years beginning on or before December 31, 2017, to which NOLs arising in tax years beginning after December 31, 2017 are carried.

Modification of rules relating to net operating loss (NOL) carrybacks

The CARES Act provides that NOLs arising in a tax year beginning after December 31, 2018 and before January 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss, and applies to NOLs arising in tax years beginning after December 31, 2017 and to tax years beginning before, on or after such date to which such NOLs are carried.

Modification of limitation on losses for noncorporate taxpayers

The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020, and applies to tax years beginning after December 31, 2017.

Acceleration of Credits for Minimum Tax Liability of Corporations

The CARES Act allows corporations (for which the alternative minimum tax was repealed for tax years after 2017) to accelerate AMT credits.

Modifications of limitation on business interest

The CARES Act temporarily and retroactively increases the limitation on the deductibility of business interest from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020, with special rules for partnerships.

Amendments regarding qualified improvement property

For property placed in service after December 31, 2017, the CARES Act provides a technical correction to the Tax Cuts and Jobs Act of 2017, and specifically designates “qualified improvement property” as 15-year property for depreciation purposes. This makes qualified improvement property a category eligible for 100% bonus depreciation.


Emergency Relief and Taxpayer Protections

The Secretary of the Treasury is authorized to make loans, loan guarantees and other investments to provide liquidity to eligible businesses, States and municipalities related to losses incurred as a result of coronavirus up to $500,000,000, with:

  • Not more than $25,000,000,000 to passenger air carriers and related businesses
  • Not more than $4,000,000,000 to cargo air carriers
  • Not more than $17,000,000,000 for businesses critical for maintaining national security
  • Not more than $454,000,000 for the Federal Reserve established programs and facilities to provide liquidity to the financial system, including by making loans to eligible businesses, States or municipalities 

Eligible businesses include air carriers and United States businesses.  Not later than April 6, 2020, the Secretary of the Treasury will publish procedures for application and minimum requirements for making loans, loan guarantees and other investments.  The Secretary of the Treasury shall establish the forms, terms and conditions for loans, guarantees and other investments. 
The Federal Reserve will establish programs or facilities, utilizing banks and other lenders, to make direct loans to, or investments in, eligible businesses created or organized in the United States, including nonprofit organizations, with between 500 and 10,000 employees.  The annual interest rate on these loans is not to exceed two percent, with a minimum of six months deferment on payments of principal and interest.  Among other things, borrowers will be required to certify that:

  • Funds will be used to retain at least 90% of workforce at full compensation and benefits until September 30, 2020
  • It intends to restore not less than 90% of workforce that existed as of February 1, 2020, and to restore all compensation and benefits to workers no later than four months after termination of the existing public health emergency
  • It is a United States entity with significant employees and operations in the United States
  • It will not pay dividends or repurchase its publicly traded equity securities
  • It will not abrogate existing collective bargaining agreements for the term of the loan plus two years
  • It will remain neutral in any union organizing effort for the term of the loan

Generally, loans and loan guarantees under these programs are conditioned upon the eligible business agreeing to limit total compensation of officers and employees while the loan or loan guarantee is outstanding plus one year.  Total compensation includes salary, bonuses, awards of stock and other financial benefits.
The authority to make new loans, loan guarantees or other investments will terminate on December 31, 2020.  Loans, loan guarantees and other investments outstanding on December 31, 2020 may be amended, modified or restructured, but may not be forgiven, and may not be extended beyond five years from the initial origination date.


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