Key Tax and Loan Provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

April 1, 2020

On March 27, 2020, the CARES Act was signed by the President.  The CARES Act is an extensive stimulus bill, which includes assistance for large and small businesses, as well as individuals.  In this alert, we are focusing on the benefits it provides to small businesses generally with less than 500 employees.

SBA Paycheck Protection Program

Under the CARES Act, qualified small businesses may receive a loan through a Paycheck Protection Program (PPP) that provides very favorable terms, with substantial portions of the loans being forgiven to the extent that employers maintain their payroll levels.

This is an expansion of the existing 7(a) Loan Program, which is the SBA’s primary program for providing loans to small businesses.

What is the Paycheck Protection Program? (updated as of April 3, 2020)

The Paycheck Protection Program provides cash-flow assistance through 100% federally guaranteed loans to employers who maintain their payroll through June 30, 2020.  The Paycheck Protection Program is attractive for many small businesses, as it allows for forgiveness of up to 8 weeks of payroll expenses based on employee retention and salary levels, there are no SBA fees, and it provides for at least six months of payment deferrals, with a maximum deferral of up to a year.   This program is retroactive to February 15, 2020 to help bring workers already laid off back onto payrolls.  Loans are available through June 30, 2020.   Starting April 3, 2020, small businesses and sole proprietorships can apply and starting April 10, 2020, independent contractors and self-employed individuals can apply.  We recommend that you apply as soon as possible, as there is a cap on funding.  The application can be found here.

Who is Eligible?

Any business, nonprofit organization, self-employed individual, or independent contractor that has been adversely impacted by COVID-19 will be eligible if that entity:

  • does not employ more than 500 employees (including full-time and part-time employees), or meets the existing SBA size standard for its industry; and
  • was in operation on February 15, 2020 and paid employees’ salaries and payroll taxes or paid independent contractors, reported on IRS Form 1099.

How do you determine loan amount?

The loan amount is the lesser of:

  • 2.5 times the business’ average monthly payroll costs incurred in the one-year period before the loan is made, or
  • $10,000,000.

The amount of payroll costs are reduced for any individual employee compensation in excess of $100,000, federal payroll taxes, sick leave paid under the Families First Coronavirus Response Act, and compensation of an employee whose principal place of residence is located outside the United States.

When and how is loan Forgiven?

After an 8-week period following the loan origination date, borrowers are eligible for loan forgiveness if the loan proceeds are spent on eligible expenses and the borrower meets certain requirements related to the retention of employees and reduction in payroll.

Expenses eligible for loan forgiveness include:

  • Payroll costs,
  • Health benefits,
  • Rent,
  • Utilities, and
  • Interest on mortgage debt.

The U.S. Department of the Treasury announced that, due to high subscription, at least 75% of the forgiven amount must be used for payroll.

The amount that may be forgiven will be proportionately reduced if the company does not maintain the average number of employees it had before the crisis or if it reduces salaries or wages of any employee who makes less than $100,000 by more than 25%.  Employers will not be penalized if they fix any decrease in employee headcount or wages by June 30, 2020.

The loan forgiveness is not taxable for federal income tax purposes.

Any portion of the loan not forgiven will have a term of not more than 10 years from the date loan forgiveness is applied for, with an interest rate fixed at 1%.  Lenders are required to defer interest and principal from the loan origination date for a period of not less than 6 months and not more than one year.

Differences between Paycheck Protection Program and the SBA disaster loans that relate to COVID-19

SBA Economic Injury Disaster Loans (EIDL) provide small businesses up to $2 million if they are located within the geographic disaster zones identified on the SBA website.  Currently, every U.S. state and territory qualifies for the EIDL program for COVID-19 impacts.  Some of the key differences between the EIDL and PPP are as follows:

  • The disaster loan amount is based on actual economic injury, where the PPP is based on a multiple of payroll.
  • The EIDL requires collateral and/or a personal guaranty for loans over certain amounts, where the PPP does not require either.
  • The interest rate under the EIDL ranges from 2.75% for non-profits to 3.75% for small businesses. The interest rate under the PPP is fixed at 1%.
  • No part of the EIDL is forgiven, but there is an Advance grant that may be available for up to $10,000, which does not need to be repaid. As described above, the PPP offers partial forgiveness.
  • EIDL will be available until December 31, 2020, while the PPP is available through June 30, 2020.

If a borrower receives an Advance grant under the EIDL program and also a PPP loan, the Advance grant will be deducted from the amount forgiven under the PPP. Also, the proceeds from the two loans cannot be used for the same purpose.

While both loan programs apply to small businesses generally, there are also some differences in eligibility as well as acceptable uses for the loan proceeds that would need to be considered when evaluating whether your company should apply for one or both of these loans.

Tax Provisions

Employee Retention Tax Credit

Businesses may be eligible for a tax credit against their payroll tax equal to 50% of qualified wages paid to each employee.  This credit is not available to any business that receives a Paycheck Protection Program loan.

A business is eligible for this credit only if they were carrying on a trade or business in 2020 and a) such business operations were fully or partially suspended by an order from the federal, state or local government because of COVID-19 or b) the business has seen a reduction in gross revenue equal to or greater than 50% when compared to the same calendar quarter of the prior year.  If the credit is based on the reduction in revenue, the business’s eligibility will continue until the business recovers, in a calendar quarter in 2020, to 80% of the prior year’s revenue for that same quarter.

For businesses with more than 100 full-time employees, the credit is only available for wages paid to employees not working because of COVID-19.  For businesses with 100 or fewer employees, all employee wages qualify for the credit.  The credit applies to the first $10,000 of compensation, including health benefits, paid to an eligible employee.  However, it does not apply to wages for which the employer is receiving a tax credit under the FFCRA.  The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.

The credit can be claimed against the business’s quarterly payroll tax liability, and, if the credit exceeds such liability, the excess amount can be claimed as a refund.

Payroll Tax Deferral

The CARES Act provides an opportunity, beginning March 27th through December 31st, 2020, for employers and self-employed individuals to defer the employer portion of the Social Security payroll taxes (the 6.2% portion) for their employees.   The employer will be required to repay 50% of the deferred payroll taxes on or before December 31, 2021, and the remaining 50% on or before December 31, 2022.  Self-employed individuals can defer the entire 12.4% self-employment tax, with the same eligibility dates and repayment dates.  A business may not defer payroll taxes if they receive loan forgiveness under the Payroll Protection Program.

Net Operating Loss (NOL) Relief

Under the CARES Act, losses from 2018, 2019 and 2020 may be carried back for 5 years, without regard to a taxable income limitation.  Businesses with losses in 2020 related to COVID-19 or otherwise will effectively be allowed to carry back those losses and offset them against taxable income from prior years, lowering their tax liability from prior years and potentially generating refunds upon amending those prior tax returns.

The CARES Act also eliminates the limitation on the use of NOL carryforwards imposed under the Tax Cuts and Jobs Act (TCJA).  NOL carryforwards arising after 2017 were limited under the TCJA to 80% of the taxpayer’s taxable income in the year of the carryforward.  The CARES act restores the offset to 100% for taxable years 2018, 2019, and 2020.

Changes to Limit on Business Interest Deduction

For 2019 and 2020, businesses may deduct business interest up to a limit of 50% of taxable income (up from the prior limit of 30%).

Charitable Deduction Limitation Increased

The charitable deduction limitation for corporations is increased to 25% of taxable income (up from the prior limit of 10%) for certain charitable cash contributions made in 2020, but these contributions must be made to a public charity.


We expect more guidance on this new Act in the coming days.  Please reach out to us if you want to discuss how these opportunities apply to your business specifically.