What You Need to Know About The CARES Act

This article covers the basics about SBA 7(a) loans, Economic Injury Disaster Loans, Paycheck Protection Loans, tax credits and unemployment assistance described in the CARES Act.

This post was updated on April 24, 2020. 

The restaurant industry is undergoing a seismic shift because of COVID-19. Sales are down across the country, and at least 30 states have now mandated that restaurants only offer takeout and delivery

Many have chosen to simply close for the time being — but whether or not these restaurants are able to come back after a long closure is almost entirely dependent on the government’s support of small businesses through this crisis. 

The CARES Act — the Coronavirus Aid, Relief, and Economic Security Act — was signed into law on March 27, 2020 and provides two trillion dollars in relief through multiple initiatives: a lending program for small businesses, unemployment support for gig economy workers, aid for the healthcare system, tax relief for businesses and individuals, and a fund dedicated to industries that have been severely impacted.

The CARES Act includes the Payment Protection Program, which will provide federally guaranteed loans to small businesses so that restaurants can continue to keep their employees on staff. The Small Business Administration (SBA) has provided details including eligible lenders and additional guidance on the program on the Paycheck Protection Program page of the SBA website. 

First we’ll go over the basics about SBA 7(a) loans, and then we’ll dive into the EIDL (Economic Injury Disaster Loan) Program and PPLs (Payment Protection Loans), which are both SBA loans described in the CARES Act. Finally, we'll cover the ERTC (Employee Retention Tax Credit), deferred payment options for the Social Security Employer Tax, and expanded unemployment insurance assistance options for out of work Americans.  

Update: On April 24, 2020, the U.S. federal government passed an additional $484B relief package, which provides increased funding to the small business relief programs, additional assistance to hospitals, and funds to expand COVID-19 testing. The package provides an additional $310B for loans for the Paycheck Protection Program, $10B for Economic Injury Disaster Loan grants, and $50B for Economic Injury Disaster Loans.

DISCLAIMER: This article is for informational purposes only and is not legal advice. If you have specific legal or tax questions, you should consult your attorney or tax advisor, as appropriate. Toast is not affiliated with the United States Small Business Administration (“SBA”), and does not act as a lender or referral agent for SBA lenders. SBA loan programs are subject to eligibility. Please consult with a counselor for the SBA or a licensed SBA lender for additional information.

And just so you know, information about the CARES Act is rapidly emerging, with new information coming out every day. This information is up to date as of the date at the top. We will do our best to provide you with updated information as it becomes available to us.

What is the CARES Act?

In an effort to address the economic impact caused by the COVID-19 health crisis, the U.S. federal government passed a stimulus bill on March 27, 2020, called the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES Act”).

The CARES Act is aimed at providing financial relief to both individuals and businesses that have experienced economic hardship created by this crisis. This stimulus package can provide restaurants with funding to help with the substantial losses caused by COVID-19 social distancing and required shelter-in-place measures.

The CARES Act will provide two trillion dollars in relief through multiple initiatives: a lending program for small businesses, unemployment support for gig economy workers, aid for the healthcare system, tax relief for businesses and individuals, and a fund dedicated to industries that have been severely impacted.

The CARES Act includes the following:

  • The Paycheck Protection Program, which will provide small businesses — including small restaurant businesses — with $349 billion in 100% federally guaranteed loans called Paycheck Protection Loans (“PPLs”). For the purposes of PPLs, small businesses are defined as businesses that employ not more than 500 employees (subject to some exceptions for non-restaurants). We’ve provided more content on PPLs below because this section of the CARES Act is targeted at relief that will be particularly helpful for restaurants.

  • Tax relief for businesses and individuals, including the delay of employer Social Security payroll taxes and increased interest deductions.

  • Unemployment compensation for gig economy workers who would not otherwise be covered by state unemployment compensation rules or if a gig economy worker has maxed out their state unemployment compensation.

  • Aid to the healthcare industry, including changes made to Health Savings Accounts.

  • A fund that allows air carriers and businesses important to national security to get cash through loans the U.S. Treasury can make (called the Exchange Stabilization Fund).

What is an SBA Loan?

SBA loans are loans guaranteed by the Small Business Administration, and funded by participating banks (or other lenders). Contrary to popular belief, in most cases, the SBA doesn’t give out loans — it just guarantees them, lowering the risk for the lenders.

According to SBA.gov, “Loans guaranteed by the SBA range from small to large and can be used for most business purposes, including long-term fixed assets and operating capital. Some loan programs set restrictions on how you can use the funds, so check with an SBA-approved lender when requesting a loan. Your lender can match you with the right loan for your business needs.”

What is an SBA 7(a) Loan?

The 7(a) loan is the SBA’s most common loan. There are many different types, and the maximum amount and interest rate, among other considerations, vary widely among them. Three of the most common types of SBA 7(a) loans are compared in the chart below, filled out with information from sba.gov. For all the other types, click here.

Interest rates for these three types of SBA 7(a) loan currently range from 9.75% to 12.75% and decrease as loan amounts increase, and a personal guaranty is required.


7(a) Standard SBA Loan

7(a) Small SBA Loan

7(a) Express SBA Loan

Maximum Loan Amount

$5 Million

$350,000

$350,000

Maximum SBA Guarantee %

85% for loans up to $150,000 and 75% for loans greater than $150,000

85% for loans up to $150,000 and 75% for loans greater than $150,000

50%

Interest Rate

Lenders and borrowers can negotiate the interest rate, but it may not exceed the SBA maximum. 

Lenders and borrowers can negotiate the interest rate, but it may not exceed the SBA maximum

Lenders and borrowers can negotiate the interest rate, but it may not exceed the SBA maximum

Eligibility Decision

By the SBA. Qualified lenders may be granted delegated authority (PLP) to make eligibility determinations without SBA review.

By the SBA. Qualified lenders may be granted delegated authority (PLP) to make eligibility determinations without SBA review.

Made by the lender

Revolving Lines of Credit

Up to 10 years.

N/A

Up to seven years with maturity extensions permitted at the outset

SBA Turnaround time

5-10 business days

5-10 business days

Within 36 hours

Forms

SBA Form 1919 and SBA Form 1920 are required for every loan (other SBA Forms may be required)

SBA Form 1919 and SBA Form 1920 are required for every loan (other SBA Forms may be required)

Lender primarily uses own forms and procedures, plus SBA Form 1919

Collateral

Lenders are not required to take collateral for loans up to $25,000. For loans in excess of $350,000, the SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If business fixed assets do not “fully secure” the loan the lender may include trading assets (using 10% of current book value for the calculation), and must take available equity in the personal real estate (residential and investment) of the principals as collateral.

Lenders are not required to take collateral for loans up to $25,000. For loans over $25,000, up to and including $350,000, the lender must follow the collateral policies and procedures that it has established and implemented for its similarly-sized non-SBA-guaranteed commercial loans, but at a minimum the lender must take a first lien on assets financed with loan proceeds and lender must take a lien on all of the applicant’s fixed assets including real estate. Lender is not required to take a lien against applicant’s real estate when the equity is less than 25% of the fair market value. The lender may limit the lien taken against real estate to the loan amount.

Lenders are not required to take collateral for loans up to $25,000. May use their existing collateral policy for loans over $25,000 up to $350,000.

Credit Decision

By the SBA. Qualified lenders may be granted delegated authority (PLP) to make credit decisions without SBA review.

By the SBA. Qualified lenders may be granted delegated authority (PLP) to make credit decisions without SBA review.

Made by the lender.

Purchase

For info on Standard 7(a) loan purchase, click here.

N/A

Lender may request expedited SBA purchase on small loans or in situations where liquidation may be delayed

How to Apply for An SBA Loan

Here’s a checklist from SBA.gov that’ll give you an idea of all the different elements that go into an SBA loan application. According to Nerdwallet, applying for an SBA loan can take anywhere from weeks to months, and you’ll need to have all your business’s financial information easily accessible, including your tax returns. 

To apply for an SBA loan, you have to have fewer than 500 employees (with some exceptions). 

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CARES Act SBA Loan: The Current State

Under the CARES act, 100% federally guaranteed loans have been made available to small businesses under the Paycheck Protection Program, to prevent workers from losing their jobs and their incomes because of the economic impact of the coronavirus crisis. 

This loan has a maturity of 2 years, an interest rate of 1.00%, and loan payments will be deferred for 6 months. You can learn more about these loans and eligible lenders on the SBA website

These Paycheck Protection Loans, or PPLs, can be used for the same purposes that you can use an SBA 7(a) loan for. However, PPLs can be eligible for forgiveness if they’re used on payroll costs (defined below), to pay rent or utilities, or to cover interest on a mortgage (not principal payments, though). See the section on loan forgiveness below. 

You can also use PPL money to pay interest on any other debt obligations incurred before February 15, 2020. 

They require no collateral or personal guarantees, don’t include any recourse against any individual member, shareholder, or partner for nonpayment, and don’t require that the borrower have no other available credit. They also have no guaranty or other fees (payable by business or lender), unlike other SBA 7(a) loan programs.

The estimated maximum amount a small business can borrow through a PPL will be based off of monthly payroll costs, and all are subject to a $10M cap. Payroll costs are defined in the list below and are prorated for February 15, 2020 to June 30, 2020, meaning payroll costs incurred before or after these dates will not be counted.  It’s also important to note that the estimated maximum amount is 2.5x payroll costs + outstanding balance of any EIDL that you would like to refinance with the PPL and that you received between January 31, 2020 and April 3, 2020.

  • Salary, wage, commission or similar compensation
  • Cash tip or equivalent
  • Payments for vacation, sick, family, or medical leave
  • Allowance for dismissal or separation
  • Payment for group health care benefits (including insurance premiums) 
  • Retirement benefits 
  • State and local taxes assessed on employee compensation 
  • Compensation to sole props or independent contractors (including commission-based compensation) up to $100K 

There are a few things that are excluded from payroll costs, including individual employee compensation in excess of $100K (pro-rated for February 15, 2020 to June 30, 2020), certain federal taxes, compensation to employees whose principal place of residence is outside the U.S., and sick or family leave wages if credit is allowed under the FFA.  

When applying for a Payroll Protection Loan, you need to state the following: 

  • The business was in operation on February 15, 2020 and had employees that were paid salaries and payroll taxes (or paid independent contractors, as reported on a form 1099-MISC) 

  • You need the loan to support your ongoing operations due to the uncertainty of current economic conditions

  • Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments. If the funds are knowingly used for unauthorized purposes, the government can hold you legally liable. Not more than 25% of loan proceeds may be used for non-payroll costs  

  • Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amount of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight week period following the loan being provided

  • Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Not more than 25% of forgiven amount may be for non-payroll costs 

  • Information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material aspects 

  • You acknowledge that the lender will confirm the eligible loan amount using tax documents that you have submitted and you confirm that the tax documents you submit are identical to those submitted to the IRS 

  • During the period beginning on February 15, 2020 and ending on December 31, 2020, you have not received PPLs or other certain SBA loans for the same purpose and are duplicative of amounts applied for or received under a covered loan. 

The Small Business Administration (“SBA”) and Department of the Treasury came out with additional guidance on April 24, 2020 that could impact companies that have applied, or are considering applying, for a Paycheck Protection Program (“PPP”) loan. Companies will need to certify in good faith that a PPP loan is necessary to support the business’s operations under current economic uncertainty. Businesses will need to take into account their current performance and ability to access other sources of funding. The SBA has created a “safe harbor” for companies that return funds prior to May 14th, 2020 meaning that they will be deemed to have met the good faith certification requirement, no questions asked.  

Eligibility for a CARES Act SBA Loan

If you run a restaurant and want to apply for a Payroll Protection Loan, 

  • You must be a small business with no more than 500 employees (with some exceptions — like if you run a restaurant business that has more than 500 employees, but you want to apply for the loan on behalf of one location that has fewer than 500 employees, you might be eligible if your business has a North American Industry Classification System code beginning with 72, which covers food service/hospitality.)

  • Your business must have been running on February 15th, 2020 and had paid employees on staff, or paid independent contractors

  • If you’re a franchisee, you must be listed on the SBA Franchise Directory

  • If you’re a sole proprietor (or an eligible self-employed person or independent contractor), you might need to provide extra documentation to prove you’re eligible, including but not limited to payroll tax filings, 1099-MISC forms, and paperwork showing income and expenses.


CARES Act SBA Loan Forgiveness

Any portion of the PPL that you use for approved purposes during the first eight weeks after receiving the PPL may be eligible to be forgiven. The approved uses are: payroll costs (using the definition above), rent or interest on a mortgage (not principal payments) (as long as the rent or mortgage agreement was in place before February 15, 2020), or utilities (electric, water, gas, telephone, transportation, and internet, as long as services began prior to February 15, 2020). Notably, the Treasury recently announced that potentially 75% of the forgiven amount will need to be for payroll costs. 

However, the amount eligible for forgiveness will be reduced if any employee’s wages or salary is reduced by more than 25% compared to the most recent full quarter, or if the business has fewer employees compared to the prior year (described below).

If a small business has fewer employees compared to the prior year, the amount eligible to be forgiven will be reduced by the following: 

Average monthly payroll costs x average number of full-time equivalent employees (FTEEs) per month for the eight week period from the time the loan is received, divided by 

  • Option 1: Average number of FTEEs per month from February 15, 2019 to June 30, 2019 

  • Option 2: Average number of FTEEs per month from January 1, 2020 to February 29, 2020 

  • For seasonal employers: Average number of FTEEs per month from February 15, 2019 to June 30, 2019 

If, between February 15, 2020 and June 30, 2020, a small business reduces any employee’s salary or wages by more than 25% of what they received during the prior full quarter that they were employed, the amount eligible to be forgiven will be reduced by the dollar amount of the wage cut that is in excess of 25%. 

The amount forgiven will not be reduced if an employer reduces its number of employees or their wages between February 15, 2020 and April 25, 2020, but then rehires that same number of employees or restores the original salary (as applicable) by June 30.

CARES Act EIDL: Your First Step

Economic Injury Disaster Loans, called EIDLs, are low-interest disaster loans that are available to small businesses going through economic hardship brought on by a disaster, including a pandemic like COVID-19. The CARES Act has made changes to the EIDL eligibility requirements that could be beneficial for restaurants. 

Unlike typical EIDLs, a COVID-19 impacted small business is not required to be unable to obtain credit elsewhere, to provide collateral or a personal guaranty, except for loans in excess of $200K (which will require a personal guaranty by an owner), or to be in operation for one year prior to the disaster provided the business was in operation by January 31, 2020. Also, the business is not required to provide tax returns to demonstrate an ability to repay.

Generally, the following eligibility criteria for businesses applying for EIDL still apply:

  • The business must be physically located within a state declared a disaster area by the SBA (businesses in all 50 states are eligible to apply)

  • The business must have suffered, or is likely to suffer, substantial economic injury as a result of the disaster

  • The business must have good credit and an ability to repay

  • Small businesses with not more than 500 employees (although this requirement has been relaxed from traditional sizing requirements)

The CARES Act makes it possible for small businesses that apply for an EIDL between January 31, 2020 and December 31, 2020 to request a grant of up to $10K. According to the SBA, eligible small businesses will receive the grant within days of applying for an EIDL. The business will not need to repay the grant, even if the EIDL application is later denied. The grant funding can be used to cover most expenses caused by a COVID-19 related substantial economic hardship, including:

  • Providing paid sick leave to employees unable to work due to COVID-19

  • Maintaining payroll to retain employees during business disruptions or substantial slowdowns

  • Meeting increased costs to obtain materials unavailable from the the original source due to interrupted supply chains

  • Making rent or mortgage payments

  • Repaying obligations that cannot be met due to revenue losses

Small businesses can apply for an EIDL and a PPL, so long as the funds are used for different purposes. A small business that received an EIDL between January 31, 2020 and April 3, 2020 can refinance their EIDL into a PPL. 

Applications for an EIDL can be completed directly on the SBA website. Learn more about EIDLs here.


Employee Retention Tax Credit

The Employee Retention Credit is available to eligible employers in an effort to encourage businesses to keep employees on their payroll throughout the COVID-19 crisis. The credit allows businesses to take a reimbursed tax credit of up to 50% of the first $10,000 in qualified wages for each employee.

What types of businesses does this credit apply to?

One of the most beneficial elements of this tax benefit is that it applies to almost all types of businesses, regardless of size, including tax-exempt organizations. The only individuals who are not able to take advantage of this credit are state and local governmental entities, and any businesses who receives a SBA loan.

Who is eligible to receive this credit?

To be eligible, an employer must have been in business during 2020 and have had partial or full suspension of their business activity due to shut-down orders by their applicable jurisdiction; or in a 2019/2020 calendar quarter comparison, starting with the first quarter of 2020, have experienced less than a 50% reduction in gross receipts as compared to gross receipts from the first quarter of 2019, until the end of any applicable subsequent calendar quarter comparisons where an employer’s gross receipts are greater than 80% in comparison to the same calendar quarter in the prior year.

What types of taxes does this credit apply to?

This credit applies to Social Security payroll and Railroad Retirement Tax Act taxes.

What types of wages can be included in determining qualified wages?

Qualified wages and compensation consist of the salary, hourly wage, tips, and etc., that an employer generally pays to their employees for work performed. The wages must be paid after March 12, 2020, and before January 1, 2021. In addition, under this benefit, the value of health plan benefits can also be included in determining the amount of wages.

If you paid any qualified wages between March 13, 2020, and March 31, 2020, inclusive, you will include 50% of those wages together with 50% of any qualified wages paid during the second quarter of 2020. 

How much of a credit can an employer take per employee?

Employers are able to take a credit each quarter of up to 50% of the first $10,000 of qualified wages for each employee. This $10,000 limit applies to wages that an employee earns over the course of all calendar quarters.

How many employees can an employer receive this credit for?

For employers who had 100 or fewer full-time employees in 2019:

If a business had 100 or fewer full-time employees in 2019, the employer can obtain credit for their employees regardless of whether an employee worked during the crisis. This means that an employer will still receive the credit, regardless of interruptions to the business. 

For employers who had more than 100 full-time employees in 2019:

If a business had more than 100 full-time employees in 2019, the credit is applicable only to employees who were not providing services for the employer during the calendar quarter due to COVID-19 prohibitions.

How do I receive my credit?

Employers can immediately obtain the reimbursement by reducing the amount of employee-withheld payroll taxes that they are required to deposit, by the amount of the credit they are eligible for.Employers can also submit a Form 7200 to apply for an advance of the credit.


Deferral of Social Security Payroll Tax Payments 

Employers are able to defer the payment of their share of the Social Security Payroll taxes until the end of 2022 in an effort to reduce the financial burden employers are currently facing during the COVID-19 crisis.

What wages can this tax deferral apply to?

This provision applies only to wages paid on March 27, 2020, and before January 1, 2021. The tax must also only be attributable to wages that were paid in 2020.

How much of the tax payment can be deferred?

Employers are permitted to defer payment of half of their share of Social Security payroll taxes to December 31, 2021, and pay the other half by December 31, 2022.


Expanded Unemployment Insurance Assistance 

Along with the passage of business tax credits and deferral of social security payments, Title II of the CARES Act made significant contributions and additions to unemployment insurance benefits programs and eligibility.

PANDEMIC UNEMPLOYMENT ASSISTANCE PROGRAM

The Pandemic Unemployment Assistance Program (PUA) is a temporary benefit program geared towards providing unemployment insurance benefits to individuals who do not qualify for other unemployment insurance benefits, but who have found themselves unable to work due to the COVID-19 crisis.

When does the PUA Program go into effect?

Benefits under the program are available from January 27, 2020, until December 31, 2020, or until the inability to work due to the COVID-19 crisis ends,if earlier.

 Who can obtain benefits under the PUA Program?

To apply for the program, applicants must self-certify that they are unemployed, unable, or unavailable to work due to COVID-19 related reasons. These reasons can include: self-quarantining to protect from exposure, displaying symptoms indicating an individual has the virus, exposure to COVID-19 positive individual(s), leaving work to provide full-time care for children who are unable to attend schools or to family or household members who have contracted the virus, and/or have received a positive diagnosis of COVID-19, and etc.

What new categories of individuals are eligible for UI benefits under this program?

Under the new program, self-employed individuals and independent contractors are now eligible to participate in these programs. Individuals who may not otherwise be eligible for benefits due to an insufficient work history may also qualify for benefits under this program.

Are any individuals ineligible for participation in the program?

Those who are able to participate in telework or who are receiving paid sick leave or other paid leave benefits are not eligible to participate in this program.

FEDERAL PANDEMIC UNEMPLOYMENT COMPENSATION

In addition to providing eligibility to obtain unemployment insurance benefits to new subsets of workers, individuals who are receiving unemployment insurance benefits in a traditional UI program or pursuant to the new PUA program may also be able to obtain an additional emergency increase of $600 per week, for up to four months.

PANDEMIC EMERGENCY COMPENSATION PROGRAM

Pursuant to the majority of state unemployment insurance laws, recipients of UI benefits can generally seek assistance for up to 26 weeks. The Pandemic Emergency Compensation Program expands that timeline for assistance by providing an additional 13 weeks of unemployment insurance benefits to eligible individuals. 

Who is eligible to obtain the additional 13 weeks of unemployment insurance benefits?

In order to obtain the additional time, individuals must not be able to obtain other forms of UI compensation by an applicable state, federal, or Canadian program, and the individual must also be actively seeking employment.

Can recipients seek the additional 13 weeks of UI benefits if they are receiving the additional $600 weekly benefit?

Yes. While recipients must generally be able to work and actively seek employment opportunities in order to qualify for unemployment insurance benefits, the CARES Act permits individuals receiving the $600 stipend to also seek this benefit concurrently, subject to state law.

WAIVER OF ONE-WEEK WAITING PERIOD

A number of states typically require a one-week waiting period before unemployment insurance benefits are paid to recipients. Pursuant to Title II, the federal government will agree to provide funds to states that would mitigate the cost of that one-week waiting period, on the condition that states agree to waive the waiting period.

TEMPORARY COMPENSATION PROGRAM FUNDING

Finally, the Act provides that the federal government will reimburse certain start-up costs for the creation of short-term compensation programs, subject to state law. The focus of these short-term programs should be to provide prorated unemployment insurance benefits to employees so that businesses are incentivized to reduce employee hours rather than lay off staff.

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Additional CARES Act Resources

You can find the CARES Act here, but below are some helpful resources in understanding how your business might be affected by the stimulus package. 

The James Beard Foundation summarized the CARES Act and what restaurants’ next steps should be. 

Eater interviewed restaurant lawyer Jasmine Moy about how to approach conversations with your landlord. 

The National Restaurant Association has created a CARES Act summary that covers the benefits to restaurants. 

You can learn more about how to apply for an PPL and EIDL on the SBA website. To find an eligible lender for a PPL, see here. If you already have an SBA loan, you can get in touch with your lender to ask about PPLs and see if you qualify. 

For more options for non-governmental financial support, see this list of national and regional resources and relief funds.

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