The CARES Act — What the Coronavirus Aid, Relief and Economic Security Act (CARES Act) Means for Businesses 


After a week of negotiations, Congress has come to an agreement on the text of a $2 Trillion dollar relief law. The CARES Act (the "Act") promises aid to individual Americans, small businesses, hospitals, and large corporations. The President signed the bill into law on March 27, 2020.   The major provisions of the law affecting businesses are:

  • Over $100 Billion in assistance to hospitals.
  • Over $350 Billion in assistance to small businesses.
  • Over $500 Billion in assistance to corporations.
  • Over $150 Billion in assistance to state and local stimulus programs.
  • Direct Loan Plan for Mid-Size Businesses.
  • Bolstering of unemployment insurance by providing $600/per week on top of what the state provides to employees.
  • Providing tax credits for qualifying business that continue to pay workers during absence due to COVID-19.
 Small Business Assistance   The assistance to small businesses comes through the Act's Paycheck Protection Plan. Specifically, the law amends the Small Business Act by authorizing special Small Business Administration (SBA) loans to cover payroll costs and certain other qualified expenses.  The law allows SBA loans for eligible businesses with hardships occurring anytime between February 15, 2020 — June 30, 2020 (the "Covered Period"). In order to qualify for the loan, the company must be either a small business, a 501(3)(c) nonprofit, a 501(c)(19) veteran's organization, or a tribal business, with no more than 500 employees (including part-time employees) in one physical location or having no more employees than the specified size standard for the industry as provided in the Small Business Act.  Additionally, sole proprietors, independent contractors, and self-employed individuals may be eligible for these small business loans. Loan amounts are available for up to 2.5 times the business's average total monthly payroll costs, up to a maximum of $10 million dollars.   Borrowers must submit a good faith certification stipulating the following: (1) that the loan is necessary to support ongoing operations under the current economic conditions; (2) that the funds will be used for payroll costs; (3) that the business does not have another loan pending under the SBA Paycheck Protection Program; and (4) that the business has not already received a loan under the SBA Paycheck Protection Program.   Businesses may only use this loan money for items designated in the CARES Act, such as "payroll costs" and other qualified business expenses. Included in the "payroll cost" definition are items such as:  
  • Compensation for employees (salary, wages, etc.),
  • Payment of cash tips,
  • Payment of various cost related to employee leave,
  • Payment of employee benefits, and
  • Payment of state taxes.
Businesses may also use the loan money for other qualified expenses such as interest on mortgage obligations (excluding prepayments or payments on the principal), rent, utilities, and interest on other debts incurred during the covered period.   Businesses may not use the loan money to compensate employees making an annual salary over $100,000, to compensate employees residing outside of the U.S., or to cover the paid leave requirements of the Families First Coronavirus Response Act (because that paid leave is already recoverable as refundable tax credits). After a business receives a loan under the CARES Act, the administrator has no recourse to go after individual shareholders, members, or partners, unless the business used the loan for a purpose not authorized.   Under the CARES Act, borrowers are eligible for loan forgiveness equal to the amount that they spent on payroll costs and specified expenses during the 8-week period prior to the origination of the covered loan. Amounts forgiven are not to exceed the principal amount of the covered loan. Additionally, the forgiveness amount will be compared to the amount spent during the same 8-week period in the previous year, proportionate to maintaining employees and wages.   Loan forgiveness is conditional on employers retaining their employees. The amount to be forgiven will be reduced proportionally by any reduction in employees compared to the prior year as well as any reduction in payment to an employee beyond 25% of their prior year compensation. Further, to incentivize employers to retain and re-hire employees, borrowers will not be penalized for having a reduced payroll at the beginning of the period if they re-hire workers previously laid off.   The law also creates special rules that apply only to small business loans provided under the CARES Act. For example, the loans are non-recourse, the normal borrower and lender fees are waived during the covered period, the requirement that a small business be unable to obtain credit elsewhere is suspended during the covered period, the personal guarantee requirement is waived, no collateral is required, and there is no prepayment penalty. Interest on the loans shall not exceed 4%. The CARES Act also allows complete deferment of loan payments for at least 6 months and not more than a year.   Mid-Size Business Assistance   The Act also provides some loan assistance to mid-sized businesses (businesses and non-profits with 500-10,000 employees). The Secretary is authorized to make direct loans to mid-sized businesses at an interest rate no higher than 2%. For at least six months, no payment on interest or principle will be due on the loan.   Loan applications require certification by the applying businesses that:
  1. economic conditions related to COVID-19 make the loan necessary to support the ongoing operations of the business;
  2. the business will use the funds received to retain at least 90% of the employer's workforce at full compensation and benefits;
  3. the employer intends to restore not less than 90% of its workforce that existed as of February 1, 2020 and to restore all compensation and benefits to workers no later than 4 months after the termination of the COVID-19 healthcare emergency;
  4. the business is domiciled in the United States with the majority of its employees in the United States;
  5. the business is not involved in a bankruptcy proceeding;
  6. the business is created or organized in the United States or under the laws of the United States;
  7. the business will not pay dividends of common stock or repurchase any equity security while the direct loan is outstanding;
  8. the business will not outsource or offshore jobs during the term of the loan and for two years after the repayment of the loan; and
  9. the business will remain neutral in any union organizing effort for the term of the loan.
   Tax Credits for Qualified Payroll Costs   The CARES Act provides tax relief to businesses and tax-exempt organizations impacted by COVID-19 crisis that have continued to pay employees during the crisis. The credit is available for any quarter in which the business: (i) fully or partially closed due to an order from a governmental authority related to COVID-19; or (ii) experienced a significant decline in gross receipts.  The period of significant decline begins with the first quarter in 2020 in which gross receipts are less than 50% of the gross receipts from the corresponding quarter in 2019, and ends with the first quarter in which the employer's gross receipts are more than 80% of the corresponding quarter in 2019.  Eligible employers may receive a tax credit for 50% of the qualified wages paid to employees from March 13, 2020 — December 31, 2020 (qualified wages for an individual employee may not exceed $10,000). Qualified health plan expenses are included in qualified wages.  This is a refundable tax credit applied against employment taxes.   For employers with more than 100 employees, the "qualified wages" are the wages paid to employees who were not providing services because of COVID-19. For employers with 100 or fewer employees, all wages paid during the government mandated closure or the period of significant decline qualify for the credit. Paid leave required under the Families First Coronavirus Response Act, however, is not included as "qualified wages." Importantly, a business will not be eligible for this credit if it takes the SBA small business loan available under the CARES Act.   In addition, the CARES Act allows employers and self-employed individuals to defer payment of the employer's share of employment taxes. Employers will be required to pay any deferred 2020 payroll tax over the next two years, with half of the tax being due by December 31, 2021 and the other half due by December 31, 2022.   Unemployment Benefits   Another important part of this bill is the assistance provided to state unemployment programs by providing $600 per week in addition to state unemployment benefits for up to four months. The law expands unemployment coverage to individuals who would not normally receive unemployment under state law. In order to qualify for the law's unemployment benefit, an individual must be out of work or unable to work because of circumstances related to COVID-19. These circumstances include, but are not limited to, personal diagnosis, family diagnosis, work closure, care for children due to school closure, and/or physician required quarantine because of high risk factors. While the list of covered individuals is expansive, there are limits. The CARES Act does not cover individuals who can telework with pay or individuals who are receiving some type of paid sick leave or other benefits.   Additional Information   Along with financial assistance, the law also creates an oversight board and a Treasury Department Special Inspector General for Pandemic Recovery to create oversight for the corporate funds. This includes requiring every loan document to be public and made available to Congress.   If you have questions about how this, or other legislation, will affect your business, the attorneys at Vandeventer Black LLP are available to assist you. 


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