CARES Act: What’s In It for Small Businesses and Small Business Owners?

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CARES Act: What’s In It for Small Businesses and Small Business Owners?

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Arthur E. Mitchell

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides $2 trillion in stimulus in response to the COVID-19 pandemic. Within that stimulus package is the Keeping American Workers Paid and Employed Act (the Act). The Act, among other things, provides $377 billion to help prevent workers from losing their jobs and aid businesses due to the economic downturn caused by the COVID-19 pandemic. The Act is organized into 14 sections, with 13 of the sections providing substantive support, reforms, or appropriations aimed at various elements of the American economy. Many of these sections provide support to small businesses and small business owners. We have summarized below those pertinent sections.

Paycheck Protection Program Overview – Section 1102

This section amends the Small Business Act to create the Paycheck Protection Program. This program authorizes the Administrator of the Small Business Administration (SBA) to fully guarantee loans offered between February 15 and June 30 of this year. The loans are offered through SBA-certified lenders to small businesses, self-employed individuals, “gig economy” individuals, certain non-profit organizations, 501(c)(3) organizations, veterans’ organizations, and Tribal business organizations. The loan amount equals 250 percent of an employer’s average monthly payroll (with exceptions for seasonal employers) but is capped at $10 million, and the interest rate cannot exceed four percent. Below are answers to a few frequently asked questions.

Q: What businesses are eligible?

Any business, non-profit organization, veterans’ organization, or Tribal business that employs 500 employees or fewer is eligible. There are some specific requirements for certain kinds of businesses, however:

  • Self-employed persons, independent contractors, and sole proprietors must submit a Form 1099 and other payroll tax filings to establish eligibility. 
  • Accommodation and food services businesses (e.g., hotels, restaurants, bed and breakfasts) with more than one physical location are covered as long as they do not employ more than 500 employees per physical location. The program waives the attribution rules in the SBA regulations for franchised accommodation and food services businesses.

The program also waives the “credit elsewhere” test,[1] but, if a borrower has already received an Economic Injury Disaster Loan, it will only be able to obtain a second Economic Injury Disaster Loan for a different purpose.

Q: What can the loan be used to cover?

The loans can be used to cover “payroll costs,” which includes: (1) salary, wage, commission or similar compensation (capped at an annual salary of $100,000); (2) payment of cash tip or equivalent; (3) payment for vacation, parental, family, medical, or sick leave; (4) allowance for dismissal or separation; (5) payment required for the provisions of group health care benefits, including insurance premiums; (6) payment of any retirement benefit; or (7) payment of state or local tax assessed on the compensation of employees. This definition also covers 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 not more than $100,000 in one year.

Q: What documentation must a business present?

An eligible business applying for a loan must certify that (1) the uncertainty of current economic conditions makes its loan request necessary to support the ongoing operations of the business; (2) the funds will be used to retain workers and maintain payroll, or make mortgage, lease, and utility payments; and (3) the business is not receiving duplicative funds for the same uses as from another SBA program. Applications are submitted to SBA-approved lenders. SBA will issue the application process within the next few weeks.

Entrepreneurial Development Overview – Section 1103

This section provides grants for education, training, and advising to Small Business Development Centers and Women’s Business Centers (WBC). These grants will help these businesses with (1) education, training, and advising on accessing and applying for resources provided by SBA and other federal resources relating to access to capital and business resiliency; (2) the hazards and prevention of the transmission of COVID-19 and other communicable diseases; (3) the potential effects of COVID-19 on the supply chains, distribution, and sale of products of small businesses and the mitigation of those effects; and (4) other risk management practices.

The Act appropriates $265 million for these grants.

State Trade Expansion Program Overview – Section 1104

The State Trade Expansion Program (STEP) makes grants to states to carry out programs that assist eligible small businesses with various issues, including (1) participation in foreign trade missions, (2) trade show exhibitions, (3) participation in training workshops, and (4) any other initiative determined appropriate by SBA. This section allows for federal grant funds appropriated to support the STEP in fiscal year 2018 and fiscal year 2019 to remain available for use through fiscal year 2021. This section also allows for state STEP participants to be reimbursed for events cancelled due to COVID-19, as long as the reimbursement does not exceed the amount of their federal grant.

Waiver of Matching Funds Requirement Under the Women’s Business Center Program – Section 1105

This provision eliminates the non-federal match requirement for Women’s Business Centers for a period of three months.

Loan Forgiveness Overview – Section 1106

A Paycheck Protection Program loan recipient is eligible for forgiveness of that indebtedness in an amount equal to the amount spent during the eight-week period after the origination date on (1) eligible payroll costs (as noted above, payroll costs do not include any compensation in excess of $100,000), (2) interest payments on any mortgage incurred prior to February 15, 2020, (3) rent payments on any lease in force prior to February 15, 2020, and (4) utility payments for which service began before February 15, 2020. However, the amount of loan forgiveness shall not exceed the principal amount of the loan. The amount forgiven will also be reduced (proportionally) by (a) any reduction in workforce (as compared to the prior year), and (b) any reduction in pay of an employee by more than 25 percent (as compared to their prior year compensation). To encourage employers to rehire any employees who have already been laid off due to the COVID-19 crisis, borrowers that rehire such workers will not be penalized for paying them less when they are rehired.

Minority Business Development Agency Overview – Section 1108

The Act appropriates $10 million for the Minority Business Development Agency to provide counseling, training, and education on federal resources and business response to COVID-19 for small businesses through the Minority Business Centers and Minority Chambers of Commerce.

United States Treasury Program Management Authority – Section 1109

This section establishes the authority of the U.S. Department of Treasury, the Farm Credit Administration, and the SBA to authorize bank and nonbank lenders (including insured credit unions) to issue pursuant to the Paycheck Protection Program.

Emergency Economic Injury Disaster Loans Grants Overview and FAQ – Section 1110

This section expands the eligibility of the SBA’s Economic Injury Disaster Loans (EIDLs). EIDLs are working capital loans to help small businesses and most private, non-profit organizations of all sizes to fulfill ordinary and necessary financial obligations that cannot be met as a direct result of the disaster. Eligibility is expanded for entities suffering economic harm due to COVID-19. This section gives the SBA more flexibility to process and disperse small dollar loans. This section also allows businesses that apply for an EIDL expedited access to capital through an Emergency Grant (an advance of $10,000 available within three days), in order to maintain payroll, provide paid sick leave, and to service other debt obligations.  The Act appropriates $10 billion to support the expanded EIDL program.

Q: Which businesses are eligible?

Any business is eligible, but the SBA will approve an emergency EIDL grant solely on the basis of an applicant’s credit score or an alternative method to gauge the applicant’s ability to repay.

Q: How should businesses apply for an EIDL?

Businesses must submit the following documentation:

  • Business Loan Application (SBA Form 5) completed and signed by business applicant
  • IRS Form 4506-T completed and signed by (1) the applicant business, (2) each principal owning 20 percent or more of the applicant business, (3) each general partner or managing member and, (4) any owner who has more than a 50 percent ownership in an affiliate business. Affiliates include business parent, subsidiaries, and/or businesses with common ownership or management.
  • Complete copies, including all schedules, of the most recent Federal income tax returns for the applicant business (or an explanation of why this isn’t available)
  • Personal Financial Statement (SBA Form 413) by the applicant (if a sole proprietorship), or each principal owning 20 percent or more of the applicant business and each general partner or managing member (if not a sole proprietorship)
  • Schedule of Liabilities listing all fixed debts (SBA Form 2202 may be used)

Q: How should businesses apply for an emergency grant?

An eligible applicant may request that the SBA provide an advance of not more than $10,000 within three days of submitting the EIDL application. Any advances received by an applicant will be reduced by the loan forgiveness amount for a loan of payroll costs.

The applicant is not required to repay any advance payments, even if they are later denied an EIDL. The advance may only be used for (1) providing sick leave to employees unable to work due to the direct effect of COVID-19, (2) maintaining payroll to retain employees during business disruptions or substantial slowdowns, (3) meeting increased costs to obtain materials unavailable from the applicant’s original source due to the interrupted supply, (4) making rent or mortgage payments, and (5) repaying obligation that cannot be met due to revenue losses.

Resources and Services Languages Other than English – Section 1111

This section directs $25 million to the SBA to offer resources and services to the 10 most commonly spoken languages other than English.

Subsidy for Certain Loan Payments – Section 1112

This section requires the SBA to pay all principal, interest, and fees on all existing SBA loan products, including 7(a), Community Advantage, 504, and Microloan programs (except for the Paycheck Protection Program), for six months as relief to small businesses negatively affected by the COVID-19 pandemic. Loans that are already on deferment will receive six months of payment by the SBA, beginning with the first payment after the deferral period. Loans made in the first six months after enactment will also receive a full six months of loan payments by the SBA. The Act appropriates $17 billion to implement this section.

Bankruptcy Overview – Section 1113

  • Payment Plan Modifications due to COVID-19: This section permits individuals and families currently in chapter 13 to seek payment plan modifications if they are experiencing a material financial hardship due to the COVID-19 pandemic, including extending their payments for up to seven years after their initial plan payment was due. This section sunsets after one year.
  • Debt Threshold Increase under Chapter 11: This section amends the Small Business Reorganization Act to increase the eligibility threshold to file under chapter 11 bankruptcy to businesses with less than $7,500,000 of debt. After one year, this increase sunsets and the threshold amount returns to $2,725,625. 
  • Exclusion of COVID-19-Related Federal Support as Income: The section also amends chapters 7 and 13 of the Bankruptcy Code to exclude COVID-19-related payments from the federal government from being treated as “income” for the purpose of filing bankruptcy. This section sunsets after one year.
  • Excludes COVID-19-Related Payments from “Disposable Income:” This section clarifies that the calculation of disposable income for purposes of confirming a chapter 13 plan shall not include COVID-19-related payments. This section sunsets after one year.

Emergency Rulemaking Authority – Section 1114

This section provides that the SBA is required to establish regulations no later than 15 days after enactment of this title.


[1] The “credit elsewhere” test ensures that assistance is available only to small businesses that are unable to obtain credit elsewhere.