What the CARES Act means to small business owners.

On March 27, 2020, the President signed into law a massive and unprecedented economic rescue package to provide a capital infusion to individuals and businesses alike.

This legislation – the Coronavirus Aid, Relief and Economic Security, CARES Act – follows on the heels of two recent bills aimed at providing emergency medical funding support, as well as paid sick leave for many employees.

Perhaps the most significant and desperately needed program to be established under the law involves the ability for small businesses (defined as those with fewer than 500 employees) to borrow up to $10 million through Small Business Association (SBA) loans under the Paycheck Protection Program (PPP). Not only is an immediate infusion of capital being made available to possibly hundreds of thousands of small businesses across the country, but also a portion of the amount borrowed may be forgiven as an effective grant based on the costs of payroll and certain business expenses. 


Brooke Zrno Grisham
Chief Executive Officer of The Nautilus Group®

Breaking down the impacts of the CARES Act.

  • In addition to small businesses normally eligible for loans under the SBA’s 7(a) program, the CARES Act broadly expands the scope of eligibility to “any business concern, non-profit organization, veteran’s organization or Tribal business concern.” Such concerns must generally have no more than 500 total employees; however, the SBA may apply a larger standard for specific industries. Non-profits are specifically defined as 501(c)(3) organizations, so not all non-profit organizations are eligible.

  • Notably, for accommodation and food service businesses (which includes most hotels, restaurants and bars under the NAICS 72 classification), the 500-employee rule is based on a per-location basis. The applicable classification, however, excludes civic and social organizations, amusement and recreation parks, theaters, and other recreation or entertainment facilities. While employee figures generally include affiliates under applicable SBA rules, such affiliation rules are waived for hotel and food service industries, as well as franchises.

  • The 500-employee threshold includes all employees, including individuals employed on a full-time, part-time or "other basis."

  • Sole proprietorships and independent contractors are eligible for loans as well.

  • Note that businesses that received an economic injury disaster loan (EIDL) after January 31, 2020, are still eligible for a PPP loan so long as the EIDL is used for separate purposes.

  • Employers who obtain a PPP loan will not be eligible for the employee retention credit due to COVID related closure; however, such credits are limited to $5,000 per employee per calendar quarter and are further limited to employment taxes payable during such period. As a result, it is likely that the Paycheck Protection Program will be much more attractive in most cases. 
  • PPP loans can be obtained through commercial banks, credit unions and other lending institutions, with the SBA providing a 100% guarantee for the loan to the lender. In order to expedite the processing of such loans, many of the requirements for traditional SBA 7(a) loans are being waived (including posting collateral, offering a personal guarantee, or demonstrating an inability to obtain loans through other channels, etc.).

  • Recent Treasury guidance indicates that application for loans for businesses and non-profits should be available on April 3rd, while loans for independent contractors and self-employed individuals will be available for application on April 10th. Under the law, borrowers will have until June 30, 2020, to apply for a loan.

  • For independent contractors, sole proprietors, and self-employed individuals, lenders are being instructed to verify eligibility through certain documents, including payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.

  • Note that recently obtained SBA loans (after January 31, 2020) but prior to the enactment of the CARES Act, may be refinanced as a covered loan under PPP loan program. 
  • The maximum amount that can be borrowed is 2.5 times the borrower’s average monthly payroll costs, up to a maximum of $10 million. Average monthly payroll costs are based on an employer’s total one-year payroll costs (as described below) prior to the date the loan is made.
    • Example: A business applies for an SBA PPP loan on May 1, 2020. For the period of May 1, 2019, until April 30, 2020, the total payroll costs of the business were $2 million, for an average monthly cost of $166,667. The maximum loan available would therefore be $416,667.
  • For “seasonal employers” (to be determined by the SBA), the average monthly payroll is based on the 12-week period beginning on February 15, 2019 (or at the election of the borrower, the average based on March 1 to June 30, 2019).

  • For new employers who may not have been in business prior to February 15th, 2019, the average monthly payroll cost may be determined based on the period from January 1, 2020, through February 29, 2020. 
  • Per recent SBA regulations, loans will carry a 1% annual interest rate over a 2-year term (the law limits interest to a maximum 4% interest rate and 10-year maximum duration). Loan repayment on interest and principal is deferred for a minimum period of 6 months, and up to 1 year. All loans made under this program are furthermore free of any pre-payment penalties that may otherwise apply.

  • The primary and obviously most attractive feature of these small business loans is the ability to not only obtain desperately needed capital in a time when revenues may have dried up, but also to have some or all of the principal repayment obligation forgiven. The amount that may be forgiven is based on expenditures incurred during the eight-week period beginning on the date of origination of the loan as to:
    • Payroll costs;
    • Interest payments on mortgages (incurred before February 15, 2020) on real or personal property of the business (not including any prepayments);
    • Rent payments under a leasing agreement (in force before February 15, 2020); and
    • Utility payments of the business including electricity, gas, water, transportation, telephone or internet access for which service began prior to February 15, 2020.
  • Note that the total amount forgiven cannot exceed the amount borrowed.  Additionally, recent SBA regulations stipulate that not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs.  More importantly, however, the amount of forgiveness is based on the extent employees are maintained on the payroll of the business. Since the purpose of the program is to enable businesses to continue paying employees where it is otherwise unprofitable or impossible to do so, the amount forgiven is reduced proportionally based on any work force reduction during the first 8 weeks after obtaining the loan.

  • To make such determination, the average monthly number of full-time employees during the forgiveness period is compared to the average monthly full time employees of the business during the period of February 15, 2019, to June 30, 2019, or (alternately at the election of the lender), the average employees employed during January 1, 2020-February 29, 2020.
    • Example: Assume total forgivable loan based on eight weeks of qualifying costs is $100,000, for loan beginning on May 1, 2020. Full-time equivalent (FTE) employees as follows:
Jan 2020 Feb 2020 Avg. monthly May 2020 Jun 2020 Avg. monthly
24 FTEs 20 FTEs 22 FTEs 18 FTEs 14 FTEs 16 FTEs

• The average proportion of employees retained is 72.73%. Therefore, the total amount forgivable is reduced to $72,730. 

  • The amount of loan forgiveness may also be reduced if the salary or wages of employees earning less than $100,000 annually is reduced by more than 25% during the eight-week period after the loan is obtained. The amount of forgiveness reduction is based on the amount of total wage reduction in excess of such 25% level, as determined by reference to the most recent quarter of earnings prior to the loan.

  • While many employees may have already been furloughed or laid off as result of the forced closure of the business, the principal forgiveness reduction will not apply to businesses that re-hire such workers by June 30th. Any reduction in employment or pay occurring between February 15, 2020, and April 26, 2020 (30 days post enactment of the CARES Act), will not be included in any assessment of the forgivable principal amount if corrected.
    • Example: A restaurant employing 25 individuals lays off the entire workforce as a result of the shutdown on April 1. A PPP loan is obtained on May 1. Assuming the entire workforce is rehired (or returns to a total of 25 employees) by June 30, the average monthly full-time employees in May and June will not otherwise trigger a reduction in the forgivable amount of loan principal.
  • Note that borrowers must request forgiveness from their lender by submitting documentation verifying the number of full-time equivalent employees, as well as their payroll costs, mortgage payments, rent payments and utilities payments. 
  • Payroll costs are very broadly defined to include salary, wages, commissions, cash tips, as well as payments for leave (including vacation, parental, family, medical or sick leave), payments for group health care benefits (including insurance premiums), and payments for retirement benefits. Note that payroll costs do not include payments made to independent contractors hired by the business (as such individuals are expected to apply for their own loans).

  • Payroll costs additionally include income and net earnings from self-employment of a sole proprietor or independent contractor.

  • In all events, the maximum annual compensation of any employee or self-employed individual considered for purposes of forgivable loans is $100,000 (equating to $1,923 per week maximum, or $15,384 total per employee for eight weeks). Additionally, compensation for these purposes is limited to employees with their principal place of residence inside the United States.

  • Payroll costs furthermore exclude any costs for qualified sick and family leave for which a tax credit is allowed under the recent Families First Coronavirus Response Act. 
  • The law is intended to assist companies that are in need of funds to keep employees on the payroll in light of the sudden economic shutdown. As such, borrowers are required to certify with their loan applications that:
    • The uncertainty of current economic conditions makes necessary the loan request to support ongoing operations;
    • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and
    • No duplicate loan applications are pending or duplicative amounts have been received.
  • The lending institutions themselves are being delegated authority to verify the purposes and suitability of the loans. It is likely that additional guidance will be forthcoming from the SBA, but the immediate intention is to make loans available to largest swath of businesses possible. For the time being, it does not appear that immediate and specific financial distress must be demonstrated.

  • While loans do not require personal guarantees, they are considered non-recourse to the business owner except to the extent that loan proceeds are used for a purpose not otherwise authorized.
  • While PPP loan principal that is forgiven is considered canceled indebtedness, the CARES Act specifically excludes such debt forgiveness from gross income for federal income tax purposes.

  • While forgiven loans are therefore effectively tax-free grants to a business owner to help fund operations, it appears that a deduction for business expenses funded via the loans should still be available to offset taxable income as earned, a potentially significant tax benefit for businesses that maintain operations.

Over 175 years of helping people through crisis.

Learn how we’ve prepared for and are responding to the coronavirus crisis.

Young professional planning financial solutions.

Virtual Tools for Financial Professionals to Meet Online

Our financial professionals are available to meet with you virtually, from the comfort of your own home.

New York Life Building

Protecting what matters most: a letter from CEO Ted Mathas

Learn how we’ve prepared for and are responding to the coronavirus crisis.

Brooke Zrno Grisham, ChFC®, CLU®, AEP®, is the Chief Executive Officer of The Nautilus Group®, a service of New York Life that provides exclusive support to high net worth individuals and closely held business owners in the areas of estate, insurance, retirement and business exit planning, income tax strategies, planning for families with special needs individuals, and charitable giving. 

The Nautilus Group® is a service of New York Life Insurance Company. This material includes a discussion of one or more tax-related topics and was prepared to assist in the promotion or marketing of the transactions or matters addressed in this material. It is not intended (and cannot be used by any taxpayer) for the purposes of avoiding any IRS penalties that may be imposed upon the taxpayer. Nautilus, New York Life Insurance Company, its employees or agents are not in the business of providing tax, legal or accounting advice. Individuals should consult with their own tax, legal or accounting advisors before implementing any planning strategies. © 2020 New York Life Insurance Company. All rights reserved.