What to Know About the CARES Act

By Dolores R. Kelley on March 27th, 2020

Posted in Business & Corporate, Stark News

As of Friday March 27th, the US Congress has voted to advance the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), that will create an estimated $2 trillion emergency relief package to aid millions of individuals, the public health sector, hard-hit industries, and small businesses effected by COVID-19.

The CARES Act will allocate $350 billion to provide relief to certain businesses through 100% guaranteed Small Business Administration (SBA) loans, a portion of which the SBA would forgive based on the employer meeting certain criteria.

Below you will find a summary of provisions in the proposed legislation applicable to businesses.

Loan Program

  • Paycheck Protection Program: $349 billion allocated for the Paycheck Protection Program, which is meant to help small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn to make payroll and cover other expenses from February 15, 2020 to June 30, 2020. Notably, small businesses may take out loans up to $10 million—limited to a formula tied to payroll costs—and can cover employees making up to $100,000 per year. Loans may be forgiven if a firm uses the loan for payroll, interest payments on mortgages, rent, and utilities and would be reduced proportionally by any reduction in employees retained compared to the prior year and a 25 percent or greater reduction in employee compensation.
  • Eligibility:
    • Any business concern, nonprofit organization, veterans’ organization if it employs no more than (i) 500 employees (includes full-time, part-time and those employed on other bases); or (ii) if applicable, the size standard in number of employees established by the SBA for the industry in which the entity operates.
    • Special Eligibility Rule for Hospitality and Dining businesses – For those with more than one physical location if it employs 500 or fewer employees per location and is assigned to the accommodation and food services section under NAICS.
    • SBA regulations on entity affiliations (under 13 CFR 121.103) are waived for the covered period for business concerns, non-profits, and veterans’ organizations for:
      • Businesses in Sector 72 under the NAICS with 500 or fewer employees;
      • Franchise businesses with SBA franchisor identifier codes; and
      • Any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act.
        • privately organized and privately managed investment firms that provide venture capital to small independent businesses
    • Sole proprietors, independent contractors, and eligible self-employed individuals (as defined in Congress’s last COVID-19 bill, the Families First Coronavirus Response Act (Families First Act)) are eligible for loans, subject to some documentation requirements to substantiate eligibility.
    • Borrower Eligibility Requirement:
      • Good-faith certification that:
        • The loan is needed to continue operations during the COVID-19 emergency;
        • Funds will be used to retain workers and maintain payroll or make mortgage, lease, and utility payments;
        • The applicant does not have any other application pending under this program for the same purpose; and
        • From 2/15/20 until 12/31/20 the applicant has not received duplicative amounts under this program.
    • Permissible Uses
      • Payroll costs
        • Includes: compensation to employees, such as salary, wage, commissions, cash, etc.; paid leave; severance payments; payment for group health benefits, including insurance premiums; retirement benefits; state and local payroll taxes; and compensation to sole proprietors or independent contractors (including commission based compensation) up to $100,000 in 1 year, prorated for the covered period.
        • Excludes: Individual employee compensation above $100,000 per year, prorated for the covered period; certain federal taxes; compensation to employees whose principal place of residence is outside the US; and sick and family leave wages for which credit is allowed under the Families First Act.
      • Group Healthcare benefits during period of paid sick, medical or family leave and insurance premiums;
      • Salaries, commissions or similar compensation;
      • Rent/lease agreement payments;
      • Utilities; and
      • Interest on any other debt obligations incurred before the covered period.
    • Loan Maximum
      • The maximum loan amount (capped at $10 million) is the lesser of:
        • (A) 2.5 times average total monthly payroll costs incurred in the one year period before the loan is made (or for seasonal employers the average monthly payroll costs for the 12 weeks beginning on 2/15/2019 or from 3/1/19 to 6/30/19); Plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between 1/31/2020 and the date on which such loan may be refinanced as part of this new program; OR
        • (B) Upon request, for business that were not in existence during the period from 2/15/19 to 6/30/19 – 2.5 times the average monthly payroll payments from 1/1/2020 to 2/29/2020; Plus the outstanding amount of a loan made under the SBA’s Disaster Loan Program between 1/31/2020 and the date on which such loan may be refinanced as part of this new program; OR
        • (C) $10 million.
  • Loan Forgiveness and Payment Deferral Relief
    • Regarding loan payment deferral rights, the CARES Act provides that businesses that were operating on February 15, 2020 and that have a pending or approved loan application under this program are presumed to qualify for complete payment deferment relief (for principal, interest, and fees) for six months to one year. Lenders are required to provide such relief during the covered period (if secondary market investors decline to approve a lender’s deferral request, the SBA must purchase the loan).
    • Indebtedness is forgiven (and excluded from gross income) in an amount (not to exceed the principal amount of the loan) equal to the following costs incurred and payments made during the covered period:
      • Payroll costs;
      • Interest payments on mortgages;
      • Rent; and
      • Utility payments.
    • Forgiveness amounts will be reduced for any employee cuts or reductions in wages.
      • There is relief from these forgiveness reduction penalties for employers who rehire employees or make up for wage reductions by June 30, 2020. Specifically, in the following circumstances, the foregoing forgiveness reduction rules will not apply to an employer between February 15, 2020 and 30 days following enactment of the CARES Act – where
        • The employer reduces the number of full time equivalent employees (FTEE) in this period and, not later than June 30, 2020, the employer has eliminated the reduction in FTEEs; or
        • There is a salary reduction, as compared to February 15, 2020, during this period for one or more employees and that reduction is eliminated by June 30, 2020.
      • The CARES Act clarifies that employers with tipped employees (as described in the Fair Labor Standards Act) may receive forgiveness for additional wages paid to those employees.
      • Loan Forgiveness Procedure: There are some required processes to apply for loan forgiveness. Borrowers seeking forgiveness of amounts must submit to their lender:
        • Documentation verifying FTEE on payroll and their pay rates;
        • Documentation on covered costs/payments (e.g., documents verifying mortgage, rent, and utility payments);
        • Certification from a business representative that the documentation is true and correct and that forgiveness amounts requested were used to retain employees and make other forgiveness-eligible payments; and
        • Any other documentation the SBA may require.
      • Lenders who rely on documentation and accompanying certifications are held harmless from SBA enforcement actions and penalties relating to the loan forgiveness.
      • Forgiveness amounts that would otherwise be includible in gross income, for federal income tax purposes, are excluded.

Unemployment Benefits

  • Expanded Unemployment Insurance – $600 per week increase in benefits for up to four months and federal funding of Unemployment Insurance benefits provided to those not usually eligible for Unemployment Insurance, such as self-employed, independent contractors, and those with limited work history. The federal government is incentivizing states to repeal any “waiting week” provisions that prevent unemployed workers from getting benefits as soon as they are laid off by fully funding the first week of UI for states that suspend such waiting periods. Additionally, the federal government will fund an additional 13 weeks of unemployment benefits through December 31, 2020 after workers have run out of state unemployment benefits.

Tax Provisions

  • Tax Relief for Businesses
    • Employers are eligible for a 50 percent refundable payroll tax credit on wages paid up to $10,000 during the crisis. It would be available to employers whose businesses were disrupted due to virus-related shutdowns and firms experiencing a decrease in gross receipts of 50 percent or more when compared to the same quarter last year. The credit is available for employees retained but not currently working due to the crisis for firms with more than 100 employees, and for all employee wages for firms with 100 or fewer employees.
    • Employer-side Social Security payroll tax payments may be delayed until January 1, 2021, with 50 percent owed on December 31, 2021 and the other half owed on December 31, 2022. The Social Security Trust Fund will be backfilled by general revenue in the interim period.
      • Employee Retention Credit
        • The CARES Act provides eligible employers – including tax-exempt organizations but not governmental entities – a refundable credit against payroll tax (Social Security and Railroad Retirement) liability equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits). Eligible employers must have carried on a trade or business during 2020 and satisfy one of two tests:
          • Have business operations fully or partially suspended operations due to orders from a governmental entity limiting commerce, travel, or group meetings; or
          • Experience a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.
        • For employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit. The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021.
    • Firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years. The NOL limit of 80 percent of taxable income is also suspended, so firms may use NOLs they have to fully offset their taxable income. The bill also modifies loss limitations for non-corporate taxpayers, including rules governing excess farm losses, and makes a technical correction to the treatment of NOLs for the 2017 and 2018 tax years.
      • Treatment of Losses
        • Certain changes to the loss provisions made by the Tax Cuts and Jobs Act (TCJA) are suspended in an effort to allow companies to utilize greater losses as well as to claim refunds for certain losses. Specifically, the CARES Act:
          • Suspends the TCJA’s 80% of taxable income limit on net operating loss (NOL) carryovers for three years, so that the limit would not apply to tax years beginning in 2018, 2019, and 2020;
          • Allows NOLs arising in 2018, 2019, and 2020 to be carried back five years; and
          • Suspends the limitations on excess farm losses and on the use of a pass-through business’ losses against non-business income for three years, so that the limits would not apply to tax years beginning in 2018, 2019, and 2020.
    • Firms with tax credit carryforwards and previous alternative minimum tax (AMT) liability can claim larger refundable tax credits than they otherwise could.
    • The net interest deduction limitation, which currently limits businesses’ ability to deduct interest paid on their tax returns to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA), has been expanded to 50 percent of EBITDA for 2019 and 2020. This will help businesses increase liquidity if they have debt or must take on more debt during the crisis.
    • Delay of Employer Payroll Taxes
      • The CARES Act postpones the due date for depositing employer payroll taxes and 50% of self-employment taxes related to Social Security and Railroad Retirement and attributable to wages paid during 2020. The deferred amounts would be payable over the next two years – half due December 31, 2021, and half due December 31, 2022.
    • Limitation on Business Interest Expense
      • The CARES Act would temporarily increase the limitation on interest deductions imposed by the TCJA. Specifically, the Act would increase the 30% of adjusted taxable income (ATI) threshold to 50% of ATI, for tax years beginning in 2019 and 2020. (Special tax year 2019 rules would apply to partnerships.) It would also allow a taxpayer to elect to use tax year 2019 ATI in lieu of tax year 2020 ATI for the purpose of calculating its tax year 2020 limitation.
  • State and local government:
    • $454 billion in emergency lending to businesses, states, and cities through the U.S. Treasury’s Exchange Stabilization Fund.
  • Executive Compensation Restrictions
    • In order for an eligible borrower to participate in CARES Act funding programs, the borrower must agree to cap all employee compensation (including salary, stock, and bonuses) for a period ending one year after the loan is repaid. For employees receiving more than $425,000 per year, (i) these employees cannot receive more compensation than they received in 2019; or (ii) severance pay or other benefits upon termination cannot exceed twice the 2019 compensation amount. Officers or employees receiving more than $3 million per year cannot receive total compensation in excess of (i) $3 million plus (ii) 50% of the excess over $3 million.

Expansion of SBA Disaster Loan Program

  • The covered period for this section is January 31, 2020-December 31, 2020. In addition to current eligible entities, the following may receive SBA disaster loans:
    • A business with 500 or fewer employees;
    • Sole proprietorships, with or without employees, and independent contractors;
    • Cooperatives with 500 or fewer employees; and
    • Employee Stock Ownership Plans with 500 or fewer employees.
  • The CARES Act makes the following additional changes to the SBA Disaster Loan program during the covered period for loans made in response to COVID-19:
    • Waives rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
    • Waives the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020);
    • Waives the requirement that an applicant be unable to find credit elsewhere; and
    • Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”
  • Entities applying for loans under the Disaster Loan Program in response to COVID-19 may, during the covered period, request an emergency advance from the Administrator of up to $10,000, which does not have to be repaid, even if the loan application is later denied. The Administrator is charged with verifying an applicant’s eligibility by accepting a “self-certification.” Advances are to be awarded within three days of an application.
    • Advances may be used for purposes already authorized under the SBA Disaster Loan Program, including:
      • Providing sick leave to employees unable to work due to direct effect of COVID-19;
      • Maintaining payroll during business disruptions during slow-downs;
      • Meeting increased supply chain costs;
      • Making rent or mortgage payments; and
      • Repaying debts that cannot be paid due to lost revenue.
    • If an entity that receives an emergency advance transfers into, or is approved for, a loan under the SBA Business Loan Program (described above), the advance amount will be reduced from any payroll cost forgiveness amounts.


  • Suspension of GAAP for COVID-19 Loan Modifications: The CARES Act allows financial institutions to make loan modifications related to COVID-19 or it effects without being categorized as a troubled debt restructuring. Such suspensions are applicable for the term of the loan modification, and may be made from March 1, 2020 through the earlier of (i) 60 days after the expiration of the national emergency declaration or (ii) December 31, 2020.
  • Credit Reporting Relief: The CARES Act requires reports to credit reporting agencies to show accounts as “current” even when there has been an account forbearance or agreement to modify payments on an account impacted by COVID-19. This will apply from January 31, 2020 through the later of 120 days after (i) enactment, or (ii) expiration of the national emergency declaration.
  • Debt Guarantee Authority: Section 4008 of the CARES Act amends Section 1105 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to allow for a guarantee of deposits held by insured depository institutions to be treated as a debt guarantee program. Specifically, through December 31, 2020:
    • The FDIC may establish a program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies; and
    • The National Credit Union Administration may temporarily increase the share insurance coverage on any non-interest-bearing transaction account in any federally-insured credit union.
  • Community Banks: The CARES Act requires prudential banking agencies to adopt an interim final rule reducing the community bank leverage ratio from nine percent to eight percent and providing a grace period for qualifying community banks to satisfy the requirement. The interim final rule will expire the earlier of (i) the expiration of the national emergency declaration, or (ii) December 31, 2020.
  • Tax Treatment of Loans: The CARES Act treats loans made or guaranteed by Treasury as debt for federal income tax purposes. It also instructs Treasury to issue guidance ensuring that ownership interests arising from loans and loan guarantees provided by the federal government under the CARES Act do not trigger a change in ownership for section 382 purposes.

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