CARES Act – Paycheck Protection Program.

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By Derek Johnson

On March 27, 2020, the President signed House Bill 748 – Coronavirus Aid, Relief, and Economics Security Act or CARES Act into law. The CARES Act consists of relief for small businesses, relief for and temporary changes to unemployment insurance benefits, individual recovery rebates, credits and deferred payment of certain employment taxes, various sections addressing America’s health care system, and certain relief for large businesses. However, this article will be addressing the relief available to small businesses, the Paycheck Protection Program.

Paycheck Protection Program

The Paycheck Protection Program is described in Division A; Title I of the CARES Act. It modifies Section 7(a) of the Small Business Act (15 USC 636(a)) to include a new form of loan that the Small Business Association (SBA) is authorized to give to Small Businesses.


The Paycheck Protection Program loan is available to most businesses that employ under 500 full time employees, and in some cases, businesses with over 500 employees.

Maximum Loan Available

The maximum loan that is available to eligible employers is the lesser of 2.5 times the employer’s average monthly payroll costs over the 1-year period before the date on which the loan is made, and $10 million. After receiving the proceeds of the loan, small businesses can use the funds to pay for:

1) payroll costs;

2) costs related to continuation of group health care benefits;

3) employee salaries;

4) payments of interest on mortgage obligations;

5) rent;

6) utilities; and

7) interest on other obligations incurred before the loan was originated.

The Paycheck Protection Program loan will be a non-recourse loan against the employer (unless the employer uses it for purposes other than the purposes listed above); will have no fees associated with it; will not require personal guarantees or collateral; and will be subject to significant forgiveness after 8 weeks.

Loan Forgiveness

As described above, the Paycheck Protection Program contains a potentially significant portion of loan forgiveness. After receiving the loans proceeds described above (2.5x average monthly payroll costs) any amount that the business spends during the subsequent 8 weeks on the covered costs (described in 1-7 above) will be forgiven from the total loan principal. For example, if a business receives $200,000 in proceeds based upon their average monthly payroll costs, and over the subsequent 8 weeks spends $180,000 on covered cost, then $180,000 of the $200,000 loan will be forgiven and the remaining $20,000 will be a loan amortized over not longer than 10 years at not more than 4% interest. What’s better is that the forgiven loan amount will not be includable as taxable income.

Reduction in Forgiveness

The amount forgiven may be reduced based upon a business’ reduction in full time employees and/or reduction in salaries of employees. For reductions based on reduction of full time employees, the forgiveness will be reduced by a percent as calculated by dividing the businesses average number of full time employees employed during the 8 week period subsequent receiving the loan, by the average number of full time employees employed during the period of February 15, 2019 to June 30 , 2019. For example if a business has 90 full time employees employed during the 8-week period subsequent to receiving the loan, but had 100 full time employees between February 15, 2019 and June 30, 2019 then since the amount of employees during the 8 week period is 90% of the employees that were employed during the February 15, 2019 to June 30, 2019, the overall forgiveness would be 90% of the amount that would otherwise be forgiven. So, if a business would have otherwise had $100,000 forgiven, but had only 90% full time employees employed when compared to a year prior, only 90% of the $100,000 would be forgiven, or $90,000. There are a few other alternate formulas for determining reduced forgiveness, based on other factors. In addition, forgiveness is reduced by any amount of employee salary that has been reduced in excess of 25% during the 8-week period subsequent receiving the loan, when compared to the prior full quarter. Reductions of forgiveness can be avoided if the business eliminates the reduction in number of full-time employees and has eliminated the reductions of wages by June 30, 2020.


A business should apply through an SBA Approved Lender. The application process will likely vary by vendor, so please contact your bank to find out what steps your business needs to take to apply.

This program seems to be a must utilize program for all small businesses that are experiencing economic hardships due to the coronavirus crisis. Due to this program’s recent release, it is expected that guidance, clarifications, or changes in interpretation may be released.

As always, if you have any questions regarding a business law matter, please feel free to reach out to us. Our experienced attorneys have the knowledge and expertise to help you navigate through the uncertainty of the Covid-19 virus. Virtual consultations are available. Stay safe.