The Small Business Owner’s Guide to the CARES Act

Last Updated: 6/15/2022
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The Paycheck Protection Program (PPP) is the cornerstone of the $2.2 trillion CARES (Coronavirus Aid, Relief, and Economic Security) Act that was signed into law on March 27, 2020. As part of the stimulus package, the PPP is tailored for small businesses across the U.S. It allocates $350 billion to help business owners in need of financial assistance keep their doors open. It’s designed as an incentive for businesses to keep their employees and continue operating during these uncertain times.

What Is the PPP and How Is it Going to Help?

A small business owner, alone in her place of business, looks at the computer to learn about the CARES Act

Essentially, the PPP is a loan given from a bank to a small business. “The bank is going to have a government guarantee. The government is going to guarantee the bank 100%, so the bank is going to have a lot less risk, so it should be a much easier, much faster process for small businesses to get that loan from the bank,” explained CPA Hector Garcia in an April 1, 2020, YouTube video.

In addition to traditional Small Business Administration (SBA) lenders such as banks and credit unions, previous lenders that were not SBA lenders before will be authorized to accept applications under the PPP.

According to the US Treasury, the PPP will provide funds to pay for the basic necessities of running a business, including up to eight weeks of payroll costs, benefits, interest on mortgages, rent and utilities. If they honor the requirements to keep their staff in place, business owners will be able to get the loans forgiven.

Is PPP Different From the SBA’s Economic Injury Disaster Loan (EIDL)?

A couple stands outside a place of business that has reduced its business hours due to the coronavirus

Yes, there is a difference. That loan is given to businesses directly by the SBA, which is a government agency. You can still apply for an EIDL from the SBA, which provides eligible small business owners in all U.S. states, Washington D.C. and territories an advance of up to $10,000 and working capital loans of up to $2 million. But you cannot take on both loans.

The PPP widens the pool of eligible businesses and allows other agents, specifically big and small banks, to provide the loans. Also, the PPP temporarily raises the maximum loan amount and waives other traditional loan requirements. It temporarily guarantees 100% of the loans, regardless of size. Traditionally, loans up to $150,000 were 85% backed by the SBA. Loans higher than $150,000 were 75% backed.

What’s Been Waived?

  • The requirement that business owners need to show they can’t obtain credit elsewhere
  • The requirement to provide a personal guarantee or collateral
  • Annual or guarantee fees for the loan
  • All prepayment penalties (the SBA formerly levied 2%–3.75% of the guaranteed portion of a loan)

How Much Will the PPP Cover?

From February 15, 2020, through June 30, 2020, known as the “covered period, the maximum loan amount has been raised from $5 million to $10 million.

PPP Cover

What Does the PPP Include?

The PPP includes amounts paid for:

  • Employee salary, wages and commissions
  • Payment of cash tips
  • Payment of vacation
  • Parental, family, medical or sick leave
  • Allowance for dismissal or separation
  • Payment required for group health benefits (including insurance premiums)
  • Payment of retirement benefits
  • Payment of state or local tax assessed on employee compensation
  • Sole proprietor income or independent contractor compensation not in excess of $100,000

What’s Not Included?

  • Compensation of an employee in excess of $100,000 (as prorated for the period)
  • Federal employment taxes imposed or withheld taxes
  • Compensation to an employee whose principal residence is outside of the U.S.
  • Qualified sick leave for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act
  • Qualified family leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act

Who Is Eligible for the PPP?

All businesses with 500 or fewer employees, which includes:

  • Nonprofits
  • Veterans organizations
  • Tribal business concerns

As well as:

  • Sole proprietorships
  • Self-employed individuals
  • Independent contractors, for the first time

Businesses in certain industries can have more than 500 employees if they meet applicable SBA employee-based size standards for those industries.

Most importantly, you have to have been in business already operating before February 15, 2020. This is not a loan for new businesses.

What Does the PPP Cover?

a small business owner is speaking on the phone while holding a cup of coffee

The PPP will cover payroll costs up to $100,000 for each employee. Because of the large number of businesses requiring assistance through the PPP, it’s expected that not more than 25% of the forgiven amount may be for non-payroll costs.

“So if you’re paying a salary that is in that region and over $100,000, the amount that goes over the cap will not be forgivable,” said Garcia. “So when you calculate what your total payroll costs are, you’re probably going to have to remove that excess of that $100,000 to come up with that calculation.”

What If You’ve Already Laid Off Your Staff Due to the Coronavirus?

Rehire them, said Garcia. The Treasury guidelines state that forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. It’ll be reduced if full-time headcount declines, or if salaries and wages decrease. “You want to keep the headcount at the original level and the wages at the original level,” explained Garcia.

If you work for a company where you were laid off, tell your boss to rehire you and apply for this loan, Garcia added. Employers that rehire employees who have already been let go by June 30, 2020, won’t be subjected to reductions in any loan forgiveness amount.

Also, businesses that have let employees go before accepting the loan will not be subject to penalties. If those businesses rehire employees after accepting the loan, they'll receive additional credit to cover wages.

When Can Business Owners Apply?

The hands of a business owner are seen as he applies for a PPP loan as part of the CARES Act

Business owners should apply for this program as soon as possible. Although you have until June 30, 2020, to apply, there is a funding gap, so it’s essentially first-come, first-serve.

  • From April 3, 2020, small businesses and sole proprietorships can apply.
  • From April 10, 2020, independent contractors and self-employed individuals can apply.
  • Other regulated lenders will be available to make these loans as soon as they are approved and enrolled in the program.

You should find out within 60 days whether or not you’ve been successful.

How Can Business Owners Apply?

Business owners can apply through banks with whom they have an existing relationship. With social distancing and work-from-home mandates in full play, this is best done online. As per the SBA, you can apply through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.

What Do You Need to Apply?

Lenders will ask you for a good faith certificate stating that:

  • The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations.
  • You will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease and utility payments.
  • You do not have an application pending for a loan duplicative of the purpose and amounts for which you applied.
  • You have not received a loan duplicative of the purpose and amounts applied for, from February 15, 2020, to December 31, 2020 (There is an opportunity to fold emergency loans made between January 31, 2020, and the date this loan program becomes available into a new loan).

If you are an independent contractor, sole proprietor or self-employed, lenders will require certain documents, which are still to be announced by the government but are likely to include payroll tax filings, Forms 1099-MISC and income and expenses from the sole proprietorship.

How Does the Loan Forgiveness Work?

A restaurant owner works on her finances with a worried look on her face as she considers the ramifications of her business being closed during the coronavirus

If the funds are used to keep payroll afloat, you’ll be able to turn the loan into a grant, but you’ll need to show proof. “This is where your accountant or bookkeeper is your best friend,” said Garcia. “You’re going to have to have immaculate records of how that money was used for pay payroll, health insurance, mortgages and rent.”

The PPP requires that at least 75% of the amount comes from payroll in order to get it forgiven. But if you spend more on rent or another cost, it will limit the amount of it to 75% for payroll. “The intention of this program is to keep your employees on staff,” said Garcia.

You’ll be eligible for loan forgiveness and cancellation of the debt during the covered period for all payments made during an eight-week period from the date the loan is funded. If you reduce your number of employees or decrease the pay of individual employees beyond 25% of their previous compensation, the loan forgiveness amount is reduced.

Any loan amounts not forgiven at the end of one year are carried forward as an ongoing loan with a maximum interest rate of 4% for a maximum of 10 years.

More Key Employer Benefits Under the CARES Act

A food service worker is seen in an industrial kitchen with a smile on her face

There are a few more benefits of the CARES Act that business owners should be aware of.

Employee Retention Credit

You are eligible for a payroll tax credit equal to 50% of “qualified wages” paid to employees from March 13, 2020, through December 31, 2020, by showing:

  • That your operations are either fully or partially suspended by a government order relating to COVID-19.


  • That your gross receipts during a calendar quarter are less than 50% of the gross receipts for the same calendar quarter during 2019.

If the average number of your full-time employees during 2019 was more than 100, qualified wages include only wages that continue to be paid to employees who are not providing services due to a COVID-19 suspension of business operations.

If your average number of full-time employees during 2019 was 100 or fewer, qualified wages include all wages paid to employees regardless of whether or not the employee is providing services. Either way, the total amount of qualified wages that can be counted can’t exceed $10,000.

Qualified wages include certain healthcare costs paid by you to maintain a group health plan. Qualified wages don’t include those taken into account for the payroll tax credit for required paid sick leave or paid family leave, which is provided for in the Families First Coronavirus Response Act. This prevents both credits from applying to the same wages you might have paid.

Payroll Tax Payments

You may defer payment of the employer share of Social Security taxes incurred between the date the CARES Act is enacted and December 31, 2020. These amounts are to be paid over the following two years, with half due on December 31, 2021, and the other half due on December 31, 2022.

Net Operating Losses Carrybacks

Any NOLs generated in a taxable year beginning in 2018, 2019 or 2020 may be carried back five years, so taxpayers with them may be able to file amended returns to carry those NOLs back to previous years as a way to generate immediate refunds.

Employee Student Loans

Employers can contribute up to $5,250 annually to the repayment of an employee’s student loan on a tax-free basis. This applies to student loan payments made after the date of the CARES Act enactment and before January 1, 2021.

There’s a lot of information for business owners to sift through in order to follow the rules required to receive relief from the Payroll Protection Plan. It’s always a good idea to discuss financial matters having to do with payroll, taxes and loans with your accountant, but it’s essential for business owners to know that they may not have to despair over letting employees go during this time of crisis and uncertainty.

There are options available to keep your employees paid so that when the time comes to re-open your business, you’ll be ready to hit the ground running with your valued employees by your side.

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