Key Provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for Small Businesses and Individuals

Client Alert
March 30, 2020

Additional details regarding the Paycheck Protection Program ("PPP") instituted under the CARES Act and the loans available to small businesses thereunder are set forth in an April 3 client alert.

These are extraordinary and fluid times for small businesses and individuals. As part of our mission as counselors and indeed partners to our clients, we have been closely reviewing the stimulus package recently signed into law (the Coronavirus Aid, Relief, and Economic Security Act, or the “CARES Act”) in order to assist you in receiving liquidity, loans, grants and other options available under the CARES Act.

While we anticipate more detailed alerts on various provisions of the CARES Act and other legislation in the days ahead, we wanted to provide you with some critical high points.

I.  Forgivable Loans for Small Businesses

This is the portion of the CARES Act of greatest interest to most small businesses. The CARES Act permits the Small Business Administration (the “SBA”) to provide loans guaranteed by the federal government to help small businesses that qualify for the program pay certain operating costs. These loans will be processed or underwritten by banks and other SBA approved lenders and are forgivable if certain conditions are met.

Loan Amount: The maximum amount available to businesses under this program is 2.5 times the average total monthly payroll costs incurred in the one-year period prior to the making of the loan. Certain exceptions may apply for seasonal employers, employers with loans outstanding under the SBA’s Disaster Loan Program and for businesses that were not in existence during the period from February 15, 2019 to June 30, 2019. Certain loans made under other federal loan programs may qualify to be refinanced as a part of a loan under this program. In any event, no loan may exceed $10 million. 

Terms of the Loan: The interest rate of the loan may not exceed four percent. The loan cannot be secured by any collateral and cannot be personally guaranteed. The loan may not require any prepayment penalties, and the SBA generally has no recourse against any individual or owner of an eligible business for non-payment so long as the business uses the loan proceeds as permitted under the CARES Act (as described below). The fees received by lenders for processing these loans are not imposed on the recipients of the loans.

How to Qualify: In order to qualify for a loan under this program, businesses must submit to their bank a good-faith certification that, among other things, the uncertain economic conditions caused by COVID-19 make the loan necessary to support their operations and that the loan proceeds will be used to retain workers, maintain payroll and make other necessary payments. With certain exceptions, applicants generally must be a business or nonprofit organization that employs not more than 500 employees (including full-time, part-time and other workers). Individuals operating as a sole proprietorship or independent contractor may also be eligible. In addition, businesses in the hospitality or dining industry that have more than one physical location may qualify if they employ not more than 500 employees per location.

The 500 Employee Affiliation Rule: The rules governing whether a business has more than 500 employees (and thus, if a business can qualify for certain benefits under the CARES Act) are complex. Businesses are generally required to include in their employee count the number of individuals employed by all of their “affiliates,” as determined under the SBA rules and regulations. Accordingly, if a business is controlled by a private equity fund or any other entity or individual that also controls multiple other businesses, then the employee count for such business may include all employees in all other companies controlled by such private equity fund, entity or individual. This affiliation rule may not apply to certain businesses, including those in the hospitality or dining industry. If a business is majority controlled by one or more outside investors or an investor group, it must consider the affiliation rules. Certain individual waivers from the SBA regarding this rule may be available.

Use of Proceeds: The loan proceeds must be used for payroll costs (including salaries, paid leave, severance payments, healthcare benefit costs, payroll taxes and other costs) up to $100,000 per employee in one year (prorated as applicable), interest payments on mortgages, rent payments, utility payments and interest payments on certain debt obligations. Certain exceptions apply.

Loan Forgiveness: If a business uses the loan proceeds in accordance with the requirements of the CARES Act, the principal amount of the loan used for such authorized expenses, but not any associated interest, will generally be forgiven. If such business reduces its workforce or salaries after receiving a loan under this program, it may not qualify for loan forgiveness or may qualify for only partial forgiveness. In addition, the amount of loan forgiveness is subject to certain reductions including (i) a reduction in the number of employees comparing the period from March 1, 2020 to June 30, 2020 against the period from March 1, 2019 to June 30, 2019 and (ii) a reduction in excess of 25% of compensation in the most recent full quarter in which an employee was paid compensation during the period from March 1, 2020 to June 30, 2020. Businesses may re-hire employees previously terminated or increase previously reduced salaries and still qualify for loan forgiveness so long as certain conditions are met.  In order to apply for loan forgiveness, businesses will need to submit certain information and documents, including, among other things, payroll filings, proof of rent or mortgage payments and a certification from a professional, such as counsel to the business, that the documentation is true and correct and that the amount for which forgiveness is requested for employee retention and other operating expenses is as discussed. The maturity date for any remaining balance on a loan after certain loan proceeds are forgiven cannot exceed ten years.  Amounts forgiven under this program are generally non-taxable for federal income tax purposes. 

What to Do: As noted above, the loans will be processed or underwritten by banks and other SBA approved lenders, so businesses can work directly with their banks to obtain loans. Each bank may have specific document requests in addition to the good-faith certification discussed above, so businesses should be sure to call their loan officers to discuss. In addition, it is important to consider that any existing credit facilities of a business may contain restrictions on the incurrence of additional debt. Such existing credit facilities should be carefully reviewed and may need to be amended or applicable provisions waived by existing lenders. It is also important to note that proceeds under such existing credit facilities, as well as other sources of cash, may be available for similar uses as loan proceeds under the CARES Act.

II.  Employee Retention Credit

Businesses that are not utilizing the forgivable loan provisions discussed above may be eligible for a new employee retention credit in an amount equal to 50% of “qualified wages” paid through year-end up to $10,000 per employee. To benefit from the new credit, the employer must be carrying on a trade or business during 2020 and its operations must either be fully or partially suspended by a governmental authority as a result of the coronavirus pandemic or the business experiences a “significant” decline in gross receipts (measured by comparing prior year comparable quarterly receipts). The credit applies to qualified wages paid between March 13, 2020 and December 31, 2020. Larger employers (average number of full-time employees in 2019 was more than 100) are subject to additional requirements. For this purpose, qualified wages include the employer’s health plan costs (typically the applicable premium).

The new credit is available to certain nonprofits. Additional rules prevent the claiming of multiple credits for the same wages.

The credit itself is generally available through a payroll tax deposit reduction, but only with respect to the employer share of FICA (6.2% up to $137,700 (for 2020)). Otherwise, the business will receive a refund.

III.  Assistance Checks for Certain Eligible Individuals

Eligible individuals are generally entitled to a “recovery rebate” of $1,200 per adult plus $500 per child. The recovery rebate is an advance on a tax credit that will be available when the individual’s 2020 federal income tax return is filed. The recovery rebate is phased out beginning at adjusted gross income (AGI) levels, as reported on a 2019 return or 2018, if 2019 has not yet been filed, of $150,000 (for joint filers), $112,500 (for head of household filers) and $75,000 (for all others). The rebate is completely phased out for AGI above $198,000 (for joint filers), $136,500 (for head of household filers) and $99,000 (for all others).

We understand that those who have provided banking information to the IRS will receive a direct deposit of the amount due while others will receive a check, which is targeted to be mailed in early April.

IV.  Retirement Plan Liquidity Options

V.  Education Benefits for Employees

The CARES Act includes a new provision that allows employees to avoid tax on student loan repayments made by their employer between March 27, 2020 and year-end with respect to any qualified education loan. The amount that may be excluded is capped at the Internal Revenue Code Section 127 limit of $5,250 (this is an annual per employee limit and so would take into account other amounts that might be excluded under this provision). Separately, the CARES Act also provides for a suspension of payments (without interest accrual) for various federal student loan borrowers through September 30, 2020.

VI.  Charitable Contribution Changes

The CARES Act makes two changes to the charitable deduction rules applicable to cash contributions by individuals. First, the 50% (or 60%) percentage limitation for “qualified contributions” made in 2020 to most public charities is suspended. The suspension is not applicable to contributions made to certain nonprofits, including supporting organizations and donor advised funds, the Congressional goal appearing to be to encourage contributions directly to operating charities that may be on the front lines of combatting COVID-19. Second, for individuals who no longer itemize, a $300 above-the-line deduction in computing AGI is permitted with respect to similar qualified contributions.

In addition, the charitable contribution limit for corporations with respect to qualified contributions is increased from 10% to 25% of the corporation’s taxable income and the special percentage limitation that applies to contributions of food inventory by a trade or business has been increased from 15% to 25%.

*  *  *

Sullivan has developed a rapid response team of attorneys to help our clients and our communities cope with the impact of the COVID-19 pandemic and understand the implications of the CARES Act and other actions taken by state governments and the federal government. Please refer to Sullivan’s newly launched resource center at for more information and for access to Sullivan’s library of related advisories.

Please know that Sullivan is focusing substantial efforts to provide assistance to businesses and individuals affected by COVID-19 and benefited by the CARES Act. If you have questions about how to move forward and navigate the novel legal issues raised by COVID-19 and/or the CARES Act, please contact your primary Sullivan attorney or send a message to

Jump to Page