Legal Alerts

COVID-19 Response: CARES Act Provides Immediate Lifeline for Small Businesses

Washington, D.C. (March 27, 2020) - Passed by the United States Senate on March 25 and the House of Representatives on March 27, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, H.R. 748, provides approximately $2 trillion in federal relief for individuals and businesses coping with the COVID-19 pandemic.

Among its provisions, the CARES Act directs massive financial resources and tax relief to small businesses. The legislation recognizes that small businesses are both particularly vulnerable to the negative economic impact from the public health directives implemented to thwart the spread of the virus and critical to the nation’s economy. Details will continue to emerge as implementation guidance is provided. At this point, however, small businesses will find the following elements of the Act particularly important.

Small Business Loans (Section 1102)

The legislation provides $349 billion for individual small business loans under section 7(a) of the Small Business Act, to cover operating expenses during the period February 15 to June 30, 2020.

Eligible Entities

  • Small businesses (see following bullet point for definition), nonprofit organizations, veterans’ organizations, and Tribal businesses;
  • Businesses with 500 or fewer employees, or a higher number if specified for that industry sector in the Small Business Administration’s (SBA) Size Standards Table;
  • Businesses with more than one physical location that employ not more than 500 employees per physical location and are assigned a NAICS code beginning with 72 (Accommodation and Food Services) at the time of disbursal; and
  • Sole-proprietors, independent contractors, and certain self-employed individuals.

Loan Amounts

  • The lesser of 2.5x the average total monthly payroll costs the borrower incurred in the one-year period before the date on which the loan is made, or a maximum of $10 million.
    • For seasonal employers, 2.5x the average monthly payroll costs for 12 weeks beginning on either February 15, 2019 or, at the election of the borrower, from March 1, 2019 to June 30, 2019 (or a maximum of $10 million).
    • For borrowers not in business during the period of February 15, 2019 to June 30, 2019, 2.5x the average total monthly payroll costs incurred from January 1, 2020 to February 29, 2020 (or a maximum of $10 million).
  • This loan amount is in addition to an outstanding loan under the SBA’s Disaster Loan Program made on or after January 31, 2020. That loan may be refinanced as part of the new, expanded loan program.

Loan Requirements and Terms

  • The applicant must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions, and that the funds will be used to retain workers, maintain payroll, or make mortgage interest, rent, or utility payments, and that the applicant has not applied for or received duplicative amounts.
  • During the covered period, the loans may be used for payroll costs (not including compensation for individuals making in excess of $100,000 per year), the cost of group healthcare benefits (paid sick, medical, or family leave), employee salaries, payments of interest on mortgage obligations (prepayments or payments of principal do not apply), rent, and utilities (the “covered period” is February 15, 2020 to June 30, 2020).
  • The interest rate for the covered loan will not exceed 4%.
  • The normal requirement that the business is unable to obtain credit elsewhere will not apply during the covered period.
  • There is no prepayment penalty for any payment made on a covered loan.
  • Borrower and lender fees are waived.
  • Complete deferment of loan payments is allowed for at least six months and up to one year (SBA will draft guidance for the deferment process).


  • Applications for loans must be submitted to lenders, not the SBA.
  • Currently, approximately 1,800 private lenders are approved by the SBA to make Section 7(a) loans
  • Treasury Secretary Mnuchin has stated he expects new regulations to be issued that would make it possible for almost all insured depository institutions to make SBA loans and to provide quick turnarounds on loan applications.

Loan Forgiveness (Section 1106)

  • See also the tax aspects discussed below.

Amount Eligible for Loan Forgiveness

  • That portion of the loan that is equal to the sum of eligible costs incurred and paid during the “covered period” (the 8-week period beginning on the date the loan originates) is subject to forgiveness.
    • Eligible costs include payroll costs (does not include annual compensation above $100,000 in wages) and any interest payment on a covered mortgage obligation, rent payment, or utility payment that was in incurred during the covered period provided that the obligation was entered into prior to February 15, 2020.
  • Limitations on loan forgiveness:
    • ​The amount of forgiveness may not exceed the principal amount of financing made available under the applicable covered loan.​
    • There is a proportional reduction in the amount forgiven with any reduction in employees retained compared to the prior year, or a reduction in the pay of any employee beyond 25% of his or her prior year compensation.
  • Borrowers that laid off employees between February 15, 2020 and 30 days after the date of enactment of the Act will not be penalized if, no later than June 30, 2020, the borrower has rehired employees and “eliminated the reduction in the number of full-time equivalent employees” (Note: It does not appear the borrower has to rehire the same individuals, just enough workers to restore the original payroll).
  • Borrowers will not be penalized if, between February 15, 2020 and 30 days after the date of enactment of the Act, they reduced the salary or wages of one or more employees, if, not later than June 30, 2020, the borrower has eliminated the reduction in the salary or wages of the employees.

Applications for Forgiveness

  • Borrowers must submit an application to the lender servicing the loan (not to the SBA). The application must include documentation verifying information on the number of employees, payroll, submission of tax and other governmental payments, along with documentation of the borrower’s payments for mortgage, lease, utilities, and other costs.
  • Borrowers must certify that the amount for which forgiveness is requested was used to retain employees, make interest payments on mortgage obligations, or make rent or utility payments.
  • The lender must issue a decision within 60 days after receipt of the application
  • Any loan amount not forgiven after one year is carried forward as an ongoing loan with a term of 10 years maximum and no more than 4% interest.
  • The SBA must issue implementing guidance and regulations within 30 days of enactment of the bill.

Small Business Tax Relief

Loan Forgiveness (Section 1106)

  • Unlike income from cancellation of indebtedness generally, no amount of a forgiven SBA loan will be included in the borrower's taxable income.

Employee retention credit (Section 2301)

  • An employer may qualify to take a refundable payroll tax credit equaling 50% of wages paid to employees during the COVID-19 crisis. The credit is available to employers suffering either of two adverse effects of the crisis:
  1. Operations were fully or partially suspended on account of a COVID-19 related shut-down order, or
  2. Gross receipts declined by more than 50% when compared to the same quarter in the prior year.
  • The credit may be taken for the first $10,000 of compensation, including health benefits, paid to each qualified employee from March 13 through December 31, 2020. However, the scope of qualified wages depends on the employer’s size:
  • Employers having more than 100 full-time employees: qualified wages consist of compensation paid to employees when they are not providing services on account of COVID-19 related circumstances.
  • Employers having 100 or fewer full-time employees: all employee wages qualify for the credit whether the employer is open for business or subject to a shutdown order.
  • The credit is "refundable," meaning that it can be taken even if it more than zeroes out the employer’s federal income tax liability.
  • An employer receiving a loan under CARES Section 1102 cannot take refundable credits against federal employment taxes.

Delay of paying employer payroll taxes (Section 2302)

  • Employers and self-employed individuals may defer paying the employer's share of Social Security tax on wages (normally 6.2% of wages). Any employment taxes an employer chooses to defer must be paid over the following two years: at least half the deferred amount paid by December 31, 2021, and the remaining amount by December 31, 2022.

Modifications for net operating losses (Section 2303)

  • In general, net operating losses (NOLs) may be carried forward but not back. Temporarily, however, any NOL arising in 2018, 2019, or 2020 can be carried back up to five years. Eligible NOLs may be carried back even if they zero out a prior year's taxable income and create a loss.

Modified Limitation on deducting business losses of noncorporate taxpayers (Section 2304)

  • In general, noncorporate taxpayers may not deduct excess business losses. An excess business loss means the amount by which business deductions exceed business income or gains plus $250,000 ($500,000 for married taxpayers filing jointly). Originally scheduled to begin applying in 2018, this limitation now will take effect starting in 2021.

Modified Limitation on Deducting Business Interest (Section 2306)

  • In general, any amount of business interest expense exceeding any business interest income may be deducted only to the extent of 30% of taxable income. For 2019 and 2020, this limitation is increased from 30% to 50% of taxable income. For tax year 2020, a taxpayer in calculating the 50% limitation may substitute 2019’s income for 2020’s income, which is potentially helpful if the taxpayer had a more successful 2019 compared to 2020.

Qualified improvement property (Section 2307)

  • Correcting an error in the Tax Cuts and Jobs Act of 2017, the Bill clarifies that bonus depreciation may be taken for “qualified improvement property” such as tenant improvements. The entire cost of the improvements may be deducted (“bonused”) in the year paid or incurred rather than having to be depreciated over the life of the building to which the improvements were made.

This is a high-stakes question with no standard answer, and businesses need to pay urgent attention to addressing it, particularly as aggressive enforcement efforts are increasing in multiple states. Lewis Brisbois’ COVID-19 Response Team is prepared to assist companies with essential business determinations, documentation, and assistance in the event of enforcement actions.


Karen C. Bennett, Partner

Thomas A. Brooks, Partner

Katherine I. Funk, Partner

Michael J. Grace, Partner

Jane C. Luxton, Partner

Amanda L. Tharpe, Associate

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