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CARES Act provides Significant Relief for Small Businesses

Joseph Most, J.D. and Ken Maeng, J.D.

3.30.20 | Client Alert – COVID-19 Update (Updated 4.16.20)


On March 27, 2020, Congress passed, and the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) to address the COVID-19 medical crisis and to inject stimulus into the economy. The Act provides significant relief for small businesses by authorizing the Small Business Administration (“SBA”) to provide 100% guarantees for up to $349 billion in loan commitments to help small businesses pay operational costs like payroll, rent, interest, health benefits, and insurance premiums by creating the new Paycheck Protection Program (the “Program”). The Program expands on the SBA’s existing so-called 7(a) loan facility and Program loans will be made by private lenders who are participants in that facility, a cohort that is expected to be broadened by the Treasury.  From the covered period of February 15, 2020 to June 30, 2020, eligible recipients could receive up to a maximum loan amount of $10 million with payments deferred for at least 6 months, a 10-year term and an interest rate capped at 4%.  Subject to certain conditions, these loans could be forgiven in part or in their entirety.


In general, any business—including nonprofits and veterans’ organizations—that was operational on February 15, 2020, had employees for whom it paid salaries and payroll taxes or paid independent contractors, has been substantially impacted by COVID-19, and has no more than 500 employees is eligible for a loan under the Program. Borrowers only need to make a “good faith certification” that the loan is necessary to support continuing operations and that they will use the funds to retain workers, maintain payroll, or make mortgage, lease and utility payments. Unlike other provisions of the SBA, this Program allows sole proprietorships to be eligible for a loan as well.

Companies with more than 500 employees may also be eligible if the SBA has prescribed a larger standard for their applicable industry. Generally, companies with common ownership, including common control, are considered affiliated for this purpose and their employee counts are aggregated together for purposes of determining eligibility1. However, the CARES Act includes a waiver of SBA affiliation rules for the restaurant and hotel industries. Additionally, the Program allows these businesses to still be eligible so long as they have no more than 500 employees per location. An employee for these purposes includes both full-time and part-time workers.

Loan Amount

The Program provides for a maximum loan amount that is the lesser of $10 million or 250% of the average monthly Payroll Costs for the 1-year period leading up to the date on which the loan is made. Special rules exist for calculations by seasonal businesses and businesses that were formed within a year of getting a loan. Payroll Costs are defined as the sum of payments with respect to employees for salary, cash tips, medical or sick leave, group health care benefits, retirement benefits, and state/local tax assessed on the compensation of employees. However, Payroll Costs do not include compensation above $100,000 to any one individual, FICA, FUTA and Wage Taxes under Internal Revenue Code (“IRC”) Sections 21, 22, and 24, and compensation of employees whose principal residence is outside of the U.S.  In addition, payments made on form 1099-Misc to an independent contractor qualify as Payroll Costs up to $100,000 per payee. Collateral and personal guarantees are not required, fees and prepayment penalties are waived, and a loan under this program is nonrecourse to the borrower, except to the extent the proceeds are used for other than the prescribed purposes below.

Use of Funds

Borrowers can use loan proceeds for:

  • Payroll Costs;
  • Costs related to the continuation of group health care benefits;
  • Employee salaries, commission or similar compensations;
  • Mortgage interest payments;
  • Rent;
  • Utilities; and
  • Interest on other debt obligations incurred prior to February 15, 2020.

Loan Deferral

The CARES Act provides that lenders must provide for the deferral of principal and interest payments by Impacted Borrowers for at least six months and no more than one year.  An Impacted Borrower is an eligible recipient in operation on February 15, 2020 that has applied for or has already been approved for a loan under the Program. There is a presumption that all Impacted Borrowers have been adversely impacted by COVID-19.

Loan Forgiveness

The Program allows for loan forgiveness in whole or in part of the amount borrowed. The Loan Forgiveness Amount, which is excluded from taxable income, is equal to Payroll Costs, mortgage interest payments, rent, and utility payments incurred and paid by the borrower during the eight-week period after the origination date of the loan (“Forgiveness Covered Period”). However, it is uncertain whether borrowers may still claim income tax deductions paid from amounts that qualify for forgiveness.

However, the CARES Act places several restrictions on the amount of loan forgiveness a business can receive. First, the forgiven amount cannot exceed the loan principal, thus excluding accrued interest. Second, the Loan Forgiveness Amount is reduced for businesses that reduce their average number of full-time equivalent employees,2 a term not defined, during the Forgiveness Covered Period. The Loan Forgiveness Amount is multiplied by the ratio of full-time equivalent employees per month during the Forgiveness Covered Period over the average number of full-time equivalent employees during the period of February 15, 2019 to June 30, 2019 or, at the borrower’s election January 1, 2020 to February 29, 2020. Third, the Loan Forgiveness Amount is reduced by the amount of reduction in total salary during the Forgiveness Covered Period of employees making less than $100,000 that exceeds 25% of total salary during the most recent full quarter before the Forgiveness Covered Period. Borrowers who rehire employees previously laid off will not be penalized if they rehire employees and/or eliminate the reduction in salaries by June 30, 2020. A final limitation is that a borrower whose Program loan is forgiven is not eligible for the payroll tax credit nor deferral of payroll tax offered under Sections 2301 and 2302 of the CARES Act. So, it is important to consider the benefits offered under each of these options in the process.

A borrower seeking loan forgiveness must provide the lender documentation verifying the number of full time equivalent employees on payroll and the pay rates, as indicated in federal and state payroll and unemployment insurance filings, documentation of other eligible  payments such as mortgage interest, rent and utilities, in the form of cancelled checks, account transcripts or other documentation, as well as a certification that the funds for which forgiveness is requested were used for the aforementioned purposes. From the accounting side, a cash management protocol should be established involving a segregated bank account for the Program loan funds to facilitate documenting their proper use.

Under the Program, approved lenders are delegated the authority to approve, make, administer, and forgive to the extent applicable, these loans, which are guaranteed by the federal government.

While SBA regulations will be issued within the next few weeks to provide further guidance, a prospective borrower should immediately identify and contact potential lenders and start gathering necessary payroll records to confirm and substantiate eligibility, the  maximum loan they will be eligible for and the potential loan forgiveness. At Berdon, we will remain available to consult and provide guidance (including assistance in the calculation of maximum loan amounts). Please reach out to your Berdon Advisor to discuss how the Paycheck Protection Program can benefit your business.

For additional information on matters relating to the COVID-19 pandemic, please contact your Berdon Advisor.

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  1. While employees of affiliates are aggregated for purposes of eligibility testing, it appears that each affiliate with payroll will be taking a separate loan under the Program.
  2. While not specified in the Program provision of the Act, “full-time equivalent employees” is defined under Section 4980H of the IRC as the number of full-time employees for any month, including the number of full-time employees determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.