The CARES Act – Paycheck Protection Program

Fennemore Craig Client Alert

The CARES Act – Paycheck Protection Program

The CARES Act, passed by the Senate on Wednesday and the House of Representatives today, was signed by the President. While the CARES Act does a number of things, this summary details only one of the provisions contained in the CARES Act: the Paycheck Protection Program.

Summary of Key Provisions

  • Business that would qualify include:
    • Businesses with up to 5001 employees or (if greater) the applicable size standard for the industry as provided by SBA’s existing regulations;
    • Businesses in the hotel and restaurant/food service industries (those with a NAIC system code that begins with 72) with more than one physical location but no more than 500 employees at each location on the date the loan is disbursed, even if overall the business has more than 500 employees
    • Nonprofit organizations
    • Eligible independent contractors and sole proprietors.
  • Loans will be available through SBA, Treasury approved banks, credit unions, and some nonbank lenders.
  • Borrowers can borrow up to 2.5 times their monthly payroll expenses, up to $10 million.
  • Applicable uses for the loan proceeds include payment of: (1) qualified payroll costs, which includes benefits; (2) rent; (3) utilities; and (4) interest on mortgage and other debt obligations.
  • Loan forgiveness is available for funds used to pay 8 weeks of payroll and other qualified expenses.

Who Qualifies for participation under the Paycheck Protection Program?

Any business in operation on February 15, 2020 with no more than 500 employees (or which meets the applicable size standard for the industry as provided by SBA’s existing regulations, if greater) is eligible. Also included are certain qualified nonprofit organizations, sole proprietorships, independent contractors, and self-employed individuals can also be covered.

A business in the accommodation and food services industry with more than one physical location qualifies if it employs no more than 500 employees at each location.

For purposes of eligibility, the SBA’s affiliate rules are waived for businesses in the hotel/restaurant industries, franchises approved on the SBA’s Franchise Directory, and small businesses that receive financing through the Small Business Investment Company program, but not for any other businesses. That means, even if you have less than 500 employees in a U.S. Subsidiary, you may have to add your other employees in affiliated entities.

What is the maximum loan amount that can be borrowed under the Paycheck Protection Program? 

A qualified business can receive the lesser of $10 million or the sum of 2.5 times the average total monthly payroll costs2 for the prior year.

What can a business use loan funds for? 

Businesses can use the loan proceeds to cover expenses including:

  • Payroll costs3, including compensation to employees; payments for vacation, parental, family, medical or sick leave; severance payments; payments required for group health care benefits (including insurance premiums), retirement benefits, and state and local employment taxes;
  • Interest payments on any mortgage obligations or other debt obligations incurred before February 15, 2020 (but not any payments or prepayments of principal);
  • Rent pursuant to lease agreements that were entered into on or before February 15, 2020; and
  • Utilities.

What are the provisions applicable to the loans made under this Paycheck Protection Program? 

The CARES Act provides that these are non-recourse4 loans that will not require any personal guarantees or pledges of collateral. Under the Act, the Small Business Administration guarantees all of the qualified loans under the Paycheck Protection Program at 100%. Interest on the loans is capped at 4%. A business applying for a loan is not required to show that it cannot obtain credit elsewhere, but all borrowers are required to certify that: (a) the loan is necessary due to the uncertainty of current economic conditions; (b) they will use the loan proceeds to retain workers, maintain payroll, or make lease, mortgage, and utility payments; and (c) that they are not receiving duplicative funds for the same uses. All payments of principal, interest, and fees under the Paycheck Protection Program are deferred for no less than 6 months and no more than 1 year. There are no SBA fees for the loans and prepayment penalties are waived.

How does a borrower get the loan forgiven?

Borrowers are eligible for loan forgiveness for up to 8 weeks5 of payroll costs, rent payments, utility payments, or mortgage interest payments. However, the amount of loan forgiveness may be reduced if the employer reduces the number of employees as compared to the prior year, or if the employer reduces the pay of any employee by more than 25% as of the last calendar quarter. But, employers who re-hire workers previously laid off as a result of the COVID-19 crisis will not be penalized for having a reduced payroll for the beginning of the relevant period.

Borrowers must apply for loan forgiveness to their lenders by submitting required documentation (as discussed in further detail below) and will receive a decision within 60 days. If there is a loan balance after loan forgiveness, the outstanding loan will have a maximum maturity date of 10 years after the application for loan forgiveness6.

What are the tax implications of loan forgiveness? 

Any amount which would be includible in gross income by reason of forgiveness shall be excluded from gross income.

How do you apply for a loan under the Paycheck Protection Program?

There will be additional guidance from the SBA regarding how to apply for these loans and to find a qualified lender.

How long do I have to obtain a loan under the Paycheck Protection Program?

To qualify, these loans have to be made prior to June 30, 2020.


[1] Includes all employees on a full-time, part-time or other basis.

[2] See exclusions and additions to payroll costs in footnote 3.

[3] For purposes of the Paycheck Protection Program, payroll costs do not include annual compensation greater than $100,000 for individual employees (prorated over the covered period of February 15, 2020 to June 30, 2020), compensation of employees with a principal place of residence outside the United States; or sick or Family Medical Leave Act wages already that are already being covered by the Families First Coronavirus Response Act. Payroll costs include payments for vacation, parental, family, medical or sick leave, group health care benefits and retirement benefits.  In addition, payroll costs can include additional wages paid to tipped workers.

[4] The only exception to the non-recourse nature of these loans is if the proceeds are used to pay an expense not allowed under the Paycheck Protection Program.

[5] This 8 week period commences on the origination date of the loan.

[6] This balance also continues to be guaranteed by the SBA.