Many clients have asked about the Coronavirus Aid, Relief, and Economic Security (CARES) Act and how their business may access the benefits.  This memorandum provides some basic direction.  We have provided a series of “Observations” which are insights from our firm that you may find helpful.  If you would like to discuss the legal implications please contact your Chmelik Sitkin & Davis, P.S. lawyer.

Caveat:  The details of the loan/grant programs created by the CARES Act are evolving.  Lawyers, bankers and financial advisors are constantly looking for updates.  This memorandum is for general information only and is based on the information available at this time.  Specific financial and legal advice should be obtained before embarking on any action.

Summary of the CARES Act:  The Act provides an integrated set of three Small Business Administration (“SBA”) administered assistance programs and a tax relief provision:

  • Paycheck Protection Program Loans
  • The Emergency Economic Injury Grant
  • The Small Business Debt Relief Program
  • Small Business Tax Provisions

Paycheck Protection Program Loans (with a Forgiveness Feature):  This program provides $349 billion for loans from local SBA section 7(a) small business loan to small businesses and non-profits.  These are the same banks that make SBA 504 real estate loans and other small business loans.  Importantly, the money does not have to be used for payroll but if it is used for payroll, mortgage interest, rent or utilities the loan is forgiven.  Here is the summary of the important points:

  • In business between February 15, 2019 and June 30, 2019.
    • Maximum loan equals 250% of the average monthly payroll during this time
  • Not in business between February 15, 2019 and June 30, 2019.
    • 250% of the average monthly payroll between January 3, 2020 and February 23, 2020.
  • There are no loan fees or prepayment fees.
  • Maximum loan amount is $10 million.
  • Only one PPP loan per entity.
  • The SBA will establish bank “application fees” which banks will be able to charge to process the applications.
  • There is no “need test” or other qualification requirement.
  • Maximum interest is 4% but the actual interest will be the same for all borrowers in the nation.
  • The loans are 100 percent federally guaranteed loans which can be used for the following purposes.
    • Payroll costs by any single employee or owner to a maximum of $100,000
    • Costs related to maintaining group health benefits
    • Payments on any mortgage interest
    • Rent
    • Utilities
    • Interest on any debt incurred before the loan
    • Presumably, held in reserve to pay these expenses
  • Forgiveness is equal to the sum of the amounts paid in the eight weeks following the loan for:
  • Payroll costs up eight (8) weeks and up to $100,000 per employee/owner, including salary, wages, commissions, vacation, parental leave, medical leave, health benefits, retirement benefits, state and local taxes and separation allowances
  • Interest on any mortgage
  • Payment of any rent obligation
  • Utility payment[1]
  • Forgiveness applications will be filed with the lending bank
  • Deferral of loan repayment for at least six months and up to one year. Any amount carried forward as a loan at the as yet to be set interest rate (no more than 4%) and a term of up to ten years
  • The government has indicated that the application period will open April 3, 2020

Observation No. 1.  Even if a business has laid off its employees, it can still obtain the loan for  business purposes.  Moreover, loan forgiveness will still be available if qualified payroll and other expenses and other qualified expenses are paid within eight weeks of receiving the loan.

Observation No. 2.   With a limited amount of funds ($349 Billion) the fund may be exhausted.  Therefore, best practice would be to apply early.

Observation No. 3.   Even if a small business is unable to spend funds within eight weeks on qualified expenses (and thereby receive 100% loan forgiveness) the low interest rate and lack of loan fees make the PPP attractive to many businesses looking for liquidity and cash reserves.

Observation No. 4.  Even if a small business is unable to spend all the funds within eight weeks on qualified expenses (and thereby only receives partial loan forgiveness) the low interest rate and lack of loan fees make the PPP attractive to many businesses looking for liquidity and cash reserves.  In essence, the effective interest rate (after the amount of the loan forgiven) will be at or below a zero-interest rate.

Observation No. 5.  Given the lack of a prepayment penalty and the relatively favorable interest rate, the PPP loan even without partial or full forgiveness is very attractive.

Observation No. 6.  Given the current uncertainty, all small businesses should very seriously consider applying for the PPP loan/grant program.  This process is initiated by contacting your business banker.  Most banks are SBA 7section (a) banks.  If not, your bank should be able to direct you to another bank.

Economic Injury Disaster Loans (with Emergency Economic Injury Grants Up to $10,000):  SBA’s Economic Injury Disaster Loan (EIDL) Program with Immediate Emergency Advance provides low interest loans with principal and interest deferred at the discretion of the SBA administrator.  Once an application is filed, the program provides an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19. The advance does not need to be repaid under any circumstance, and may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments. Here is the summary of the important points.

  • This is not unique to COVID-19. The program is used in many public disasters.  The CARES Act has provided funding into this program.
  • Eligible businesses and non-profits must have been in operation as of January 31, 2020. The list includes, Sole proprietorships, with or without employees, independent contractors, cooperatives, employee owned businesses and tribal small businesses.
  • Maximum loan amount is $2 million.
  • There is a $10,000 immediately (within 3 days of application).
  • Loan proceeds can be used to pay for “expenses that could have been met had a disaster not occurred, including payroll and other operating expenses.”
  • The SBA administrator will set the interest rate and loan repayment terms for all Corvid-19 related loans.
  • Application for these loans are made directly to the SBA at
  • A PPP loan can be refinanced into an EIDL loan.
  • The loans are available to cover expenses for the period January 3, 2020 to December 31, 2020.
  • The SBA waived any personal guarantee on advances and loans below $200,000. For loan amounts over $200,000, the SBA may require personal guarantees.

Observation No. 1.  The EIDL loans are used in many disasters.  The unique feature is a $10,000 no repayable grant.

Observation No. 2.  While this program has been around for years, the CARES Act injected funding.  It is particularly attractive to sole proprietors and independent contractors harmed by the Corvid-19 emergency.  For example, a sole practitioner dentist or a small subcontractor may seek an EIDL loan to cover expenses until the practice reopens.

Observation No. 3.  Unlike the PPP loans, these loans are approved directly by the SBA.  These loans may likely provide emergency relief sooner than a PPP program.

Observation No. 4.  Given the $10,000 grant, the lack of a prepayment penalty and the relatively favorable interest rate, the EIDL loan (like a PPP loan) is very attractive.

Observation No. 5.  Given the current uncertainty, all small businesses should very seriously consider applying for the EIDL loan.  This process is initiated by contacting the SBA.

Small Business Debt Relief (SBDR) Program:  This program is aimed at small businesses that have existing SBA guaranteed loans, in particular section 7(a), section 504 (real estate loans) and SBA microloans.  Under the SBDR program , the SBA will cover all loan payments on these SBA loans, including principal, interest, and fees, for six months. This relief will also be available to new borrowers who take out loans within six months of the President signing the bill into law. Here is the summary of the important points.

  • The SBDR program will apply to existing and new section 7(a) small business loans (not made under the PPP program), new section 504 fixed asset and real estate loans and microloans. These loans are made by banks but guaranteed (in part) by the SBA.
  • Six months of loan payments, including principal, interest, and fees will be paid by the SBA.
  • Section 7(a) loans are up to $5 million for small businesses that lack credit elsewhere.
  • Section 504 loans are available up to $5.5 million for approved fixed assets or real estate.
  • Microloans are available up to $50,000.
  • The SBDR does not apply to PPP loans.

Observation No. 1.  The SBDR program will be of most use to existing SBA loan customers and those businesses that may be planning on obtaining a traditional SBA loan.  For example, a business planning on buying a building or equipment may find the SBDR  program attractive.

Observation No. 2.  The SBDR program is less useful to  businesses without and existing SBA guaranteed loans.

Small Business Tax Provisions:  The CARES Act also contained several tax credit and tax delay provisions.  These are briefly summarized as follows.

  • Employee Retention Credit for Employers Subject to Closure or Experiencing Economic Hardship. This provision would provide a refundable payroll tax credit for 50 percent of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also provided to employers who have experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis. This is not available to businesses receiving a PPP loan.
  • Delay of Payment of Employer Payroll Taxes. This provision would allow taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Payroll taxes that can be deferred include the employer portion of FICA taxes and half of SECA tax liability. This is not available to businesses receiving a PPP loan.

Observation No. 1.  Even without any loan activity, the tax provisions may provide some relief and liquidity for small businesses.

Observation No. 2.  Like any tax credit or tax deferral, the rules are complex.  Small businesses should seek out advise from a certified public accountant or other tax advisor.

[1] The Department of Treasury has indicated that given the size of the fund and anticipated participation the sum of mortgage interest, rent and utility payments may be capped at 25% of the loan forgiveness.