CARES Act Loans for Small Busnesses

The just-enacted Coronavirus Aid, Relief, and Economic Security (‘‘CARES’’) Act makes loans available to eligible small businesses to help them continue paying their employees amid the COVID-19 pandemic.  The loans are administered by the Federal Small Business Administration.   Covered loan principal will be forgiven to the extent the borrower shows it was used for qualifying paying payroll, mortgage interest, lease, and utility obligations. expenses.  But loan forgiveness is reduced to the extent the borrower fails to maintain in the covered period after the loan is advanced the level of full-time equivalent employees it maintained before the loan was advanced.

Eligible Small Business

An eligible small business is any business concern, nonprofit organization, veterans organization, or Tribal business concern employing not more than the greater of—

  • 500 employees; or
  • if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern, nonprofit organization, veterans  organization or Tribal business concern operates.

A business concern with more than one location employing not more than 500 employees at any one location may qualify as an eligible small business. 

 “Employee” for this purpose includes an individual employed on a full-time basis, part-time basis, or other basis.

“Business concern” includes an entity such as a corporation, limited liability company, general partnership, or limited partnership. 

Individuals who operate as a sole proprietorship or an independent contractor and self-employed individuals may qualify to receive a covered loan.   They must submit documentation necessary to establish their eligibility, including payroll tax filings, Forms 1099-MISC, and income and expense documentation, as determined by the SBA Administrator and the Secretary of the Treasury.

Qualifying Loan

To apply for a CARES Act loan, an eligible recipient should contact a bank which makes SBA loans. Many bank allow online applications for CARES Act loans.

The maximum amount of a CARES Act loan is the eligible recipient’s average monthly payroll cost in the year preceding the making of the loan, multiplied by 2.5.  But if the eligible recipient was not in business in the period beginning February 15, 2019 and ending June 30, 2019, then the maximum amount of the eligible recipient’s CARES Act loan is the eligible recipient’s average monthly payroll cost in the period beginning January 1, 2020 and ending February 29, 2020, multiplied by 2.5.  In any event, a CARES Act loan cannot exceed $10 million. 

A CARES Act loan may be used for—

  • payroll costs;
  • costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • employee salaries, commissions, or similar compensations;
  • payment of interest on any mortgage obligation;
  • rent;
  • utilities; or
  • interest on any debt obligations that were incurred before the covered period.

Neither personal guarantee nor collateral shall be required with respect to a covered loan.  The Small Business Administrator shall have no recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan for nonpayment of any covered loan, except to the extent such shareholder, member, or partner used the covered loan proceeds for a purpose other than a purpose authorized by the CARES Act.

A “covered loan” is a loan made under the CARES Act during the covered period.  The “covered period” for this purpose is the period beginning February 15, 2020 and ending June 30, 2020.

The interest rate on a covered loan shall not exceed 4 percent.

The eligible recipient of a covered loan is charged no fee for the loan.  The SBA reimburses the loan processing fee directly the lending bank.

Payroll Costs

“Payroll costs” is a key term under the CARES Act.  It means the sum of payments of any compensation with respect to employees that is a—

  • salary, wage, commission, or similar compensation;
  • payment of a cash tip or equivalent
  • payment of vacation, parental, family, medical, or sick leave;
  • allowance for dismissal or separation;
  • payments required for the provisions of group health care benefits, including insurance premiums;
  • payment of any retirement benefit;
  • payment of State or local tax assessed on the compensation of employees.

“Payroll costs”also includes the sum of payments of any compensation to or income of a sole proprietor or independent              contractor that is a wage, commission, income, net  earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.

“Payroll costs” does not include—

  • compensation of an individual employee in excess of an annual salary of $100,000 prorated over the covered period;
  • Federal Insurance Contribution Act (“F.I.C.A.”) tax or Federal income tax withheld or imposed on employees’ wages; or
  • Any compensation of an employee whose principal residence is outside of the United States.

So, “payroll costs” is the employee’s gross pay (at an annual rate not exceeding $100,000), reduced by F.I.C.A. tax and Federal income tax withheld from the employee’s wages, but not by State income tax or any other withholdings. 

Loan Forgiveness

An eligible recipient shall be eligible for forgiveness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:

  • payroll costs;
  • any payment of interest on a covered mortgage obligation;
  • any payment of rent on a covered rent obligation; and
  • any covered utility payment.

An “eligible recipient” is the recipient of a covered loan.

The “covered period” for this purpose is the eight weeks following making of the covered loan.

A “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that—

  • is a liability of the borrower;
  • is a mortgage on real or personal property; and
  • was incurred before February 15, 2020.

A “covered rent” obligation is a rent obligation under a under a lease agreement in force before February 15, 2020.

A “covered utility” payment is a payment for utility service begun before February 15, 2020.

The amount of loan forgiveness shall not exceed the principal amount of the financing made available under the applicable covered loan.

The amount of loan principal otherwise forgivable under the CARES Act shall be reduced (but not increased) by multiplying it by a fraction.  The numerator of the fraction is the eligible recipient’s average number of full-time equivalent employees during the covered period.  The denominator of the fraction is the eligible recipient’s average number of full-time equivalent employees during the period from February 15, 2019 to June 30, 2019, or, at the election of the eligible recipient, the eligible recipient’s average number of full-time equivalent employees from January 1, 2020 to February 29, 2020. The product of the eligible recipient’s loan principal otherwise forgivable under the CARES Act multiplied by the fraction is the eligible recipient’s loan principal forgivable under the CARES Act.

Example.  Employer receives a $1,000,000 forgivable loan under the CARES Act.  Employer used all of the loan proceeds for allowable expenditures under the CARES Act—payroll costs; payment of interest on covered mortgage obligations; payment of rent on covered rent obligations; and payment of covered utility obligations.  Employer had an average of 150 full time equivalent employees during the eight weeks following receipt of the loan.  From February 15, 2019 to June 30, 2019, Employer had an average of 190 full-time equivalent employees.  From January 1, 2020 to February 29, 2020, Employer had an average of 200 full time equivalent employees.  Employer would choose its full-time equivalent employees for the February 15 to June 30, 2019 period as the denominator of its loan forgiveness reduction fraction, as this results in a lower reduction of loan forgiveness.  Accordingly, Employer is entitled to forgiveness of 150/190 x $1,000,000 = $789,464 of principal of its $1,000,000 loan.  Employer is not entitled to forgiveness of interest on the loan.

The amount of loan forgiveness also shall be reduced by the amount in total reduction in salary or wages of an employee during the covered period in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.

Accomplishing Loan Forgiveness

An eligible recipient seeking forgiveness of a CARES Act loan shall submit to the lender which is servicing the covered loan an application which shall include—

  • documentation verifying the number of full-time equivalent employees on payroll and pay rates for pertinent periods, including—
  • payroll tax filings reported to the Internal Revenue Service; and
  • state income, payroll, and unemployment insurance filings;
  • documentation, including cancelled checks, payment receipts, account transcripts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments; and
  • a certification from a representative of the eligible recipient authorized to make such certifications that—
  • the documentation presented is true correct; and
  • the loan principal for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
  • other documentation the SBA Administrator deems necessary.

Not less than 60 days after a lender receives an application for loan forgiveness from an eligible recipient, it shall issue a decision on the application.

Eligible Recipients Not Taxed on Loan Forgiveness

Gross income for Federal income tax purposes ordinarily includes cancellation of indebtedness income.  Significantly, the CARES Act specifically excludes debt forgiven under the CARES Act from the borrower’s gross income.

Employer Receiving CARES Act Loan Disabled from Payroll Tax Credits

The CARES Act also provides an eligible employer with a refundable payroll tax credit of up to $5,000 for each employee’s wages paid from March 13, 2020 through December 31, 2020.  Generally, an employer is eligible for such payroll tax credits if its operations were fully or partially suspended during the COVID-19 crisis by a governmental shut-down, or if its gross receipts declined by more than 50 percent as compared to the same quarter in 2019.   An employer receiving a CARES Act loan is not eligible for CARES Act payroll tax credits.


Low-interest loans available under the CARES Act will help American small businesses continue operating in the Coronavirus pandemic.  That the loans may be forgiven to the extent a borrower uses the proceeds for qualifying business expenses and retains its workforce makes them especially attractive. 

Posted in

Stephen J. Dunn

Tax and Estate Planning Attorney and Author

Leave a Comment