The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”) was enacted on March 27, 2020.

The Paycheck Protection Program, Title I of the CARES Act provides $349 billion of tax-free cash grants to small businesses in the United States in the form of loans from financial institutions, 100% guaranteed by the federal government through the SBA.  The loans will be forgiven, and the financial institutions repaid by the SBA, if the loan proceeds are used for certain defined payroll purposes (including benefits and state and local taxes).  In addition, the loans can be used for other purposes, such as rent, mortgage payments, utilities, and certain other expenses, but these uses are not forgiven.

The Act also amends to Internal Revenue Code such that the amount forgiven is not taxable income to the business.  In other words, this “loan” is really a tax-free cash grant to the business to the extent it is used for payroll and certain specified expenses.  The amount of the loan that is not forgiven, if any, is payable over 10 years at 4.0% annual interest.  The full amount of the loan is 100% federally guaranteed for the life of the loan.

A major intent of the Act is to have businesses keep employees on the payroll. In addition to the use of proceeds limitations described above, the Act limits the amount of forgiveness if payroll is reduced or employees are not rehired.

The loans amount can be 2.5 times the average monthly payroll (including taxes, benefits, local taxes, etc.).  There are various measurement periods (e.g., monthly average for the 12 month period prior to the making of the loan, or just second quarter of 2019 if the employment is seasonal, etc.).   There is a $10 million cap on the loans, but no minimum.


  1. Chad Campbell on March 27, 2020 at 8:52 pm

    Thank you for posting this informative article. My small business is staffed by a mix of W-2 employees and 1099 consultants. Given that the regulations are not yet published, does it appear likely that I can apply for a payroll loan that would cover “salary” for my employees and consultants? Or, alternatively, should I advise my 1099 consultants to apply individually?

    • John Hayes on March 30, 2020 at 1:17 pm

      At the moment, it looks like your “payroll costs” can include both W-2 salaried employees and 1099 consultants (subject to certain limitations) in all three areas: the amount of the loan, allowable use of proceeds, and amount to be forgiven. Based on the fact that the Act specifically allows sole practitioners and other self-employed, it appears that both you, as the employer of the contractor, and the contractor may be able to apply. The final SBA regs may limit this. However, since the objective of the CARES Act is to get as much money at work in the economy as possible, a little “double dipping” is not a bad thing.

  2. Lila Beall on March 28, 2020 at 11:35 am

    Do we apply for this loan through the SBA or our local bank?

    • John Hayes on March 30, 2020 at 1:12 pm

      THE question of the hour! Lila, we do not know yet, but will post here as soon as we do. The PPP was made part of the SBA 7(a) program by the CARES Act, and 7(a) applications are made to the local (or national) SBA lenders, not the SBA. The PPP is greatly streamlined over the normal 7(a) and may have a central application point. See the paper on the “Catch 22” we are posting for a caution on making applications.

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