The “Coronavirus Aid, Relief, and Economic Security Act,” or “Cares Act,” Is Law

March 27, 2020

Friday afternoon, President Trump signed the ‘‘Coronavirus Aid, Relief, and Economic Security Act,’’ or ‘‘CARES Act.’’ The legislation creates several new programs aimed at providing financial assistance to individuals and businesses suffering from the COVID-19 crisis. One of these, the Paycheck Protection Program (the “Program”), offers business loans that, in many cases, can be forgiven and converted to grants. Other provisions of the CARES ACT supplement existing loan programs and provide tax relief for businesses and individuals.

Loans Under the Paycheck Protection Program

Who’s Eligible? In general, the Paycheck Protection Program defines “Eligible Businesses” as organizations with fewer than 501 employees that are:

(i) independently owned and operated for profit organizations (if they are not dominant in their respective fields),
(ii) 501(c)(3) nonprofits,
(iii) 501(c)(19) veteran’s organizations
(iv) sole proprietors, independent contractors, or other self- employed individuals, such as “gig economy” workers, or
(v) tribal business concerns.

Businesses in the Accommodation and Food Services Sector, and businesses of not more than the applicable size standard for their industry as provided by the Small Business Administration (SBA), are not limited to 500 employees. All Program loans must be made prior to June 30, 2020.

How much? Under the Program, Eligible Businesses may borrow up to 250% of a business’s average monthly payroll costs over the last 12 months, not to exceed up to $10 Million, (the “Covered Loans”), during the period beginning February 15, 2020 and ending June 30, 2020 (the “Program Covered Period”). The Program will be run by the SBA, but standard SBA terms will not apply. That means the Covered Loans will bear interest at 4% or less, will not require any personal guarantees or other collateral, and will be nonrecourse against the equity holders of the borrower (except to the extent that the loan is used for other than the Eligible Costs (as defined below) and in the cases of misuse). More importantly, Covered Loans are eligible for significant loan forgiveness, discussed below. In the event any portion of a Covered Loan is not forgiven, repayment of that balance may be deferred for at least 6 months, and up to 12 months, with a maximum maturity date of ten (10) years from the date of application for loan forgiveness. (Note: we expect the SBA to issue regulations addressing the requirements for the 12 month extension shortly).

What can they be used for? The proceeds of a Covered Loan may be used for payment of:

  • payroll costs (defined below), costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums, employee salaries, commissions, or similar compensations,
  • payments of interest on any mortgage (excluding any payment of principal),
  • payments of rent;
  • payments for utilities, and
  • on any other debt obligation that was incurred before the Program Covered Period

(together, the “Eligible Costs”).

The definition of “payroll costs” under the Program is particularly broad, and includes the sum of payments of any compensation to employees that is:

  • a salary, wage, commission, or similar compensation;
  • payment of cash tip or equivalent;
  • payment for vacation, parental, family, medical, or sick leave;
  • allowance for dismissal or separation;
  • payment required for the provisions of group health care benefits, including insurance premiums;
  • payment of any retirement benefit; or
  • 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. It does not, however, include compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the Program Covered Period, and certain employment taxes imposed or withheld during the Program Covered Period, any compensation of an employee whose principal place of residence is outside of the U.S., qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (the “FFCRA”), or qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA.

Loan Forgiveness
Borrowers with a Covered Loan are eligible for tax-free loan forgiveness, effectively converting the applicable loan portion to a grant. The amount that can be forgiven (the “Total Loan Forgiveness”) is equal to the total Eligible Costs incurred and payments made during the 8-week period after the date of the loan (the “Loan Forgiveness Covered Period”), excluding any interest on any other debt obligations.

There are limitations to the loan forgiveness program. The Total Loan Forgiveness cannot exceed the total principal of the Covered Loan. If the borrower lays off any employees or reduces the salary or wages of any employee, the Total Loan Forgiveness may be reduced as follows:

If the borrower lays off any employees, the Total Loan Forgiveness will be reduced by multiplying the amount of Total Loan Forgiveness by a fraction equal to the average number of full-time equivalent employees (“FTEEs”) during the Loan Forgiveness Covered Period divided by the average number of FTEEs employed either from February 15, 2019 to June 30, 2019 or from January 1, 2020 to February 29, 2020 (at the borrower’s election). Note this reduction applies to the Total Loan Forgiveness, not just the amount borrowed for payroll costs, but a portion of the amount borrowed for mortgage interest, rent and utility payments as well.

If the borrower reduces the salary or wages of any employee by more than 25% (as compared to the most recent full quarter of employment before the Loan Forgiveness Covered Period), the amount of loan forgiveness will be reduced by the same amount. This reduction in the amount of loan forgiveness does not apply to any employee with an annual salary of $100,000 or more.

Borrowers can avoid the reductions if they rehire or make up for wage reductions by June 30, 2020 under the following circumstances:

  • If the borrower reduces the number of FTEEs between February 15, 2020 and 30 days after the CARES Act is enacted, and has eliminated this reduction by June 30, 2020; or
  • If, in the case of a salary reduction during this same initial period for one or more employees, the reduction is eliminated by the same date in June of this year.

Other Programs:

SBA Express Loans
In addition to the Paycheck Protection Program, the CARES Act expands another important SBA program, the SBA Express Loan Program. Loans under this program (“Express Loans”) now may be up to $1,000,000. Express Loans must be approved by the SBA within 36 hours and usually must be funded within 90 days, although we expect that Regulations will require they be funded much faster. The CARES Act returns the maximum amount of Express Loans to $350,000 effective January 1, 2021.

Emergency EIDL Grants
Another provision of the CARES Act deals with Economic Injury Disaster Loan grants (“EIDL Loans”). An entity with not more than 500 employees, and any individual who operates under a sole proprietorship or as an independent contractor, will be eligible for a loan made under section 7(b)(2) of the Small Business Act in response to COVID–19 during the period January 31, 2020 through December 31, 2020. During this period, an applicant for an EIDL Loan may request that the SBA advance up to $10,000 within three (3) days after the SBA receives the application and the applicant’s self-certification of eligibility.

Under the CARES Act, the SBA cannot require a personal guarantee on advances and loans under $200,000. An advance may be used for any allowed purpose, including providing paid sick leave to employees unable to work due to COVID–19, maintaining payroll, meeting increased costs to obtain materials due to interrupted supply chains, making rent or mortgage payments, and repaying other obligations that cannot be met due to revenue losses. The SBA is also waiving the standard requirements that an applicant needs to be in business for one year before the disaster, and the requirement that an applicant be unable to obtain credit elsewhere. The SBA is permitted to approve an applicant based solely on the credit score of the applicant.

SBA Subsidy
For businesses that received loans under Section 7(a) of the Small Business Act, exclusive of the Paycheck Protection Program loans, the government will provide a subsidy whereby the SBA will pay six (6) months of principal, interest, and fees on qualifying loans.



Cash Payments
The CARES Act provides for cash payments of up to $1,200 per person, ($2,400 for a married couple), and an additional $500 to each qualifying child in the form of an advanced tax credit. Payments are subject to a phase-out of $5 per every $100 for single individuals with adjusted gross income (AGI) above $75,000 per year and $150,000 for married couples. The phase out begins after an AGI of $112,000 for individuals filing as head of household. The credits are completely eliminated after an AGI of $99,000 for single filers, after $198,000 for those married filing joint, and $136,000 for those filing as head of household. The credit for qualifying children is eliminated once the above thresholds are reached, plus $10,000 per child. Payments will be based on a filer’s 2019 AGI if his or her returns have already been filed, or 2018’s AGI if 2019 returns have not yet been filed. A true-up in tax year 2020 will occur to account for cases in which an individual was not eligible based on 2019 AGI but was eligible based on 2018 AGI. Such individuals may see their entire payments recaptured.

Retirement Accounts
The CARES Act allows certain individuals affected by COVID-19 to withdraw up to $100,000 from a qualified retirement account (e.g. 401(k), 403(b)) or individual retirement account (IRA). The 10% early withdrawal penalty is waived, and the withdrawn amount can be elected to be taken into income over a three year period. In addition, withdrawn amounts may be repaid within three years to avoid being taken into income.

Qualifying individuals may also borrow up to $100,000 from retirement accounts and may defer repayment for up to one year. In addition, required minimum distributions are waived for tax year 2020.

A retirement account holder qualifies for this benefit if i) he or she, a spouse, or a child is diagnosed with COVID-19; or ii) he or she suffers adverse financial consequences due to being quarantined, furloughed, laid off, or unable to work due to certain COVID-19 related impacts. Individuals may self-certify their eligibility to retirement plan administrators.

Deduction for Charitable Donations
Beginning in 2020, charitable cash donations up to $300 will be deductible by individuals, even if they do not itemize deductions and claim the standard deduction.

In addition, the 50% of AGI limit on charitable deductions for individuals is waived for donations made during tax year 2020. This waiver does not apply to donations to non-operating private foundation or donor advised funds. The 2020 limitation for C corporations is increased from 10% to 25% of taxable income.


Additional Payroll Tax Credits
An eligible employer may claim a credit against employment taxes equal to 50% of qualified wages for each employee during each calendar quarter through the end of 2020. Qualified wages are limited to $10,000 per employee per quarter. The credit is limited to the total employment taxes owed for all employees for each calendar quarter as reduced by any other credits claimed, including the recently enacted Sick Leave and Family and Medical Leave credits under the Families First Coronavirus Response Act. Credit cannot be claimed against any employment taxes paid for with a Program loan described above.

An eligible employer is an employer who i) had operations fully or partially suspended due to COVID-19, AND ii) experienced a 50% or more decline in gross revenue in 2020 as measured compared to the same corresponding quarter of 2019. Eligibility ends once gross revenue in the current quarter exceeds 80% of gross revenue from the corresponding prior year’s quarter.

Employer and Self-Employment Deferral of Payroll Tax Payment
Employers and self-employed individuals may defer payment of the employer portion of employment taxes and self-employment taxes incurred between enactment of the CARES Act and December 31, 2020. One half of the deferred taxes must be paid by each of December 31 of 2021 and 2022. Penalties will not apply on the deferred payment of these amounts.

Net Operating Loss Rules
The CARES Act loosens many of the restrictions on the use of net operating losses (NOLs). NOLs from 2018, 2019, and 2020 may again be carried back for five years and the 80% limitation has been removed for these years.

Business Interest Limitation

The CARES Act increases the limitation on the deduction of net business interest expense from 30% to 50% for tax years 2019 and 2020 and allows taxpayers to elect to use 2019 taxable income as the base amount for the 2020 tax year, if it is higher.

If you would like additional information, please contact the authors of this Alert: Robert Maloney (; 617-456-8008); John Bradley (; 617-456-8076); John Chu (; 617-456-8007); Serge Bechade (; 617-456-8016); or John Bateman (; 617-456-8087).

Comments are closed.

Sign up for updates

We publish Client Alerts regularly on a variety of business topics of interest to our clients.  Please let us know if you’d like to be added to our mailing list.