Paycheck Protection Program CARES Act

CARES Act – Paycheck Protection Program Loan Forgiveness

by William Restis

published March 29, 2020

UPDATED 4/7/2020

The draft final of the SBA’s implementing regulation has been released, found here.

UPDATED 4/1/2020

The SBA just released the application Form. It provides for a maximum loan amount of 2.5 x the average monthly payroll cost. As discussed below, this seems contrary to the plain language of the statute. Calculations made below should be modified accordingly. 

This post is intended to help owners of small businesses take advantage of the Paycheck Protection Program in the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. It provides expanded loan programs through the Small Business Association, which, if used for designated purposes such as payroll, rent, employee health care, can be forgiven tax free up to $10,000,000 per business. That’s some serious assistance to small businesses that desperately need it. Let’s take a look.

The relevant provisions of the CARES Act are found in Sections 1102 and 1106. Section 1102 creates the Paycheck Protection Program, and Section 1106 deals with forgiveness of certain portions of loans taken out under Section 1102.

Below is my initial review of the law, which has not been interpreted by the SBA or the courts. But because small businesses are in such dire need, I wanted to get this out ASAP as a public service announcement. There are also a lot of benefits in the Act that are not discussed, so read it carefully. And as always, nuance is omitted so DYOR.


Section 1102 provides that a “small business” may take out an SBA “Section 7(a)” loan up to the lesser of (a) $10,000,000, or (b) the sum of “payroll costs” for the 12 month period before the loan is made, multiplied by 2.5. § 1102(a)(2)(E)

There is some confusion about what Section 1102(a)(2)(E) means when it says the maximum loan amount is “the product obtained by multiplying” “the average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made” “by 2.5.” Do we multiply 2.5 by a single monthly average, giving us 2.5 months? Or do we multiply 2.5 by a year of costs? The plain language of the statute seems to state the latter. To emphasize, it says “the total monthly payments [not payment] by the applicant for payroll costs incurred during the 1-year period.” A restrictive reading is hard to tease out of the statute, and would be internally inconsistent with a law that has a “covered period” of 4.5 months. Cf, § 1102(a)(2)(A)(iii). But I’ve been informed others, such as the Chamber of Commerce, disagree.

What’s included in payroll costs? It includes the sum of: salary, wages, commissions, tips, plus payment for vacation, parental, family, medical, or sick leave, plus allowances for dismissal or separation, plus group health care premiums, plus retirement benefits, plus state payroll taxes. § 1102(a)(2)(A)(viii). It also includes payments to sole proprietors, self employed people, and independent contractors, capped as discussed below. Id., and 1102(a)(1)(A)(v).  

So what “small businesses” are entitled to use the program? Generally speaking, a small business has less than 500 employees, and can include non-profits, veteran organizations, or tribal business. § 1102(a)(1)(D).

What can the loans be used for? Paycheck Protection Program loans can be used to cover “payroll costs” as described above, plus interest on mortgages, rent, utilities, and interest on debt incurred before February 15, 2020. § 1102(a)(2)(F). The proceeds of the loans can be used to pay these expenses for the period of February 15 to June 30, 2020. § 1102(a)(2)(A)(iii). For sole proprietors, it looks like you can pay yourself up to $37,500 in direct payments plus health care, and retirement.

For high earners and sole proprietors, the amount per employee is capped at $37,500. This is because the maximum amount that can be included in direct payments (not health care, retirement, etc.) cannot exceed an annualized salary of $100,000 prorated for the 4.5 months between February 15th through June 30th ($100k /12 x 4.5). §§ 1102(a)(2)(A)(viii)(I)(bb) and (viii)(II)(aa).

The loans are non-recourse, the borrower only needs to certify a good faith belief that current economic conditions make the loan necessary to support the ongoing operations of the business, and that the borrower is not taking multiple SBA loans for the same purpose. §§ 1102(a)(2)(F)(v), (a)(2)(G) and (a)(2)(J). Lenders are required to waive application fees on Paycheck Protection Program loans. § 1102(a)(2)(H). Interest rates on the loan are capped at four percent, and payments on the loans are deferred until June 30, 2020. § 1102(a)(2)(L) and (M).

So lets recap. A small business, including a non-profit, can take out loans up to 2.5 times their annual “payroll costs” capped at $10 million. For example, if “payroll costs” as defined in § 1102(a)(2)(A)(viii) are $100,000 per month for the previous 12 months, a business can get a loan up to $3,000,000 ($100k x 12 x 2.5). Remember that payroll costs for an individual employee making $100,000 or more can’t exceed $37,500 per year. So take that into consideration.

Those loans can be used for the expanded definition of payroll, mortgages or rent, utilities, and interest on debt incurred before February 15, 2020. Loan proceeds used for each of these categories must be spent on payments to cover the period between February 15 through June 30, 2020. The loans are non-recourse, capped at four percent, and do not need to be paid back until after June 30th.

But that is not the good part. The good part of Paycheck Protection Program loans is that they can be forgiven tax free if the proceeds are used to pay payroll, rent or mortgage, and utilities during an eight week period. And it’s tax free.


Under Section 1106 of the CARES Act, portions of Paycheck Protection Program loans can be forgiven. This includes payments for the following items incurred in or paid during the eight weeks following loan origination: “payroll costs” as defined above, plus mortgage interest, rent, and utilities. §1106(a)(2)-(5), and (7)(A)-(D).

The payment period for forgiveness under Section 1106 is different for the payment period for use of loan proceeds under 1102. The “covered period” for use of proceeds is February 15 through June 30, as described above. §1102(a)(2)(A)(iii). However, for forgiveness, the “covered period” means “the 8-week period beginning on the date of the loan origination.” § 1106(a)(3). 1006 states that a borrower “shall be eligible for forgiveness of indebtedness on a covered loan on an amount of the following costs incurred and payments made during the covered period for” the enumerated items in Section 1106(a)(7)(A)-(D).

This could be read two ways. It could be interpreted to restrict the amount written off to payments made for enumerated categories incurred during that eight week period. In such case, a borrower could only write off eight weeks of payments. But the statute doesn’t say that. It says that the payments made for enumerated items during the eight week period can be forgiven. So I read it as requiring payments made for the period between February 15 through June 30, 2020 be paid within eight weeks following loan origination. The SBA could take the restrictive view, so be cautious. But if the SBA did take such a restrictive view, it would make for a good class action.

Again, let’s break it down. Let’s say a small business has four employees (including the owner) making more than $100,000 annually salary, group health insurance premiums of $3,000, 401k contributions of $4,000, monthly office rent of $5,000, and utility obligations of $500. Each month, the following amount is subject to forgiveness: $33,333.32 ($8,333.33 max per employee x 4) + $3,000 (insurance) + $4,000 (401k) + $5,000 (rent) + $500 (utilities) = $45,833.32.

The total amount that could be forgiven is $45,833.32 x 2 = $91,666.64 if we construe the “covered period” to be eight weeks, or $45,833.32 x 4.5 = $206,249.94 if we construe the “covered period” to include all payments made on permissible uses during the eight week period following origination. The amount forgiven will not be included in the company’s net income, so it’s tax free. § 1106(i). That adds up fast and can be a LIFE SAVER for a small business.

There are important caveats. The amount forgiven will be reduced if the employer reduces the number of employees / contractors or reduces their hours. §§ 1106(d)(2) and (d)(3). There are special considerations for tipped workers and re-hires. §§ 1106(d)(4) and (d)(5). The math is complicated, but appears intended to incentivize small businesses to keep all their employees at their previous pay.

Most important proviso is that borrowers maintain the records necessary to get their loan forgiven. The borrower will be required to make an application to their lender with documentation including: payroll tax filings reported to the IRS, and state income, payroll and unemployment insurance filings. § 1106(e)(1). It must include cancelled checks, and receipts for payment, for items such as rent and utilities. § 1106(e)(2). The SBA can also add additional requirements, so keep an eye out. If the borrower does not have this documentation, they are not eligible for loan forgiveness. § 1106(f).


Loan applications begin at the SBA website. Be careful to choose a Section 7(a) loan, the SBA’s main loan program. To receive the benefits I’m describing, do not choose a “disaster relief” loan. That’s something different.

The borrower first submits an solicitation for lender interest, then lenders will contact the business owner so they can submit a formal application.

Once the loan is funded, I would put it in a separate bank account to make documenting the loan easier. If any amounts are unused, they can be paid back. If you are being aggressive about forgiveness of a full 4.5 months of payments, be prepared to argue that it should be allowed. And most importantly, PASS THIS ALONG TO YOUR SMALL BUSINESS OWNER FRIENDS AND FAMILY. They need our help.

Although I am not soliciting any clients related to this topic, SOME STATES MAY CONSIDER THIS AN ATTORNEY ADVERTISEMENT.

I am not your attorney, and this is not legal or investment advice.

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