In the late hours of March 25, 2020 the U.S. Senate unanimously passed the Coronavirus Aid, Relief, and Economic Security Act (dubbed the CARES Act), an anxiously awaited bill to help Americans navigate this new COVID-19 induced economic environment. While the bill still needs to go through the House of Representatives and receive a final signature by the President, we have poured over the details as they stand now and will issue revisions as needed as details become more permanent.

While the bill in its entirety stands at over 800 pages, one of the most significant aspects is that of the Paycheck Protection Program (PPP). Expanding upon the Small Business Act (SBA), this is a 7(a) loan program in which loans are to be made under a good faith certification that the requested funds are necessary to support the ongoing operations of the business due to uncertainty caused by COVID-19 and such funds will be used to retain workers and maintain payroll or to make payments on other allowable costs stated below.


  • “Small Business Concerns” which are simply defined as any businesses that were in operation on February 15th, 2020 employing no more than 500 employees (full-time, part-time, or other basis)
    • Businesses for the purpose of this act also includes sole proprietorships, nonprofit organizations, veterans organizations, and tribal business concerns
  • A further understanding of the definition of “small business concerns” can be found here:
  •  Funding will be available through local financial institutions
  • This Act waived the previous requirement of an inability to secure credit elsewhere


  • The “covered period” referred to begins February 15, 2020 extending through June 30, 2020
  • “Payroll costs” are payments of compensation including salaries, wages, commission; cash tips or equivalent; vacation, parental, family, medical or sick leave; health care benefits including insurance premiums; retirement benefits
    • Should not include the compensation of:
      • an individual employee in excess of an annual salary of $100,000 as prorated for the covered period
      • an employee whose principal residence is outside of the US
      • qualified sick leave under Families First Coronavirus Response Act


This is determined by taking the lessor of:

  • 2.5 times the average total monthly payments for payroll costs incurred during the 1-year period before the date of the loan origination PLUS the outstanding amount of loan under subsection (b)(2) (any disaster loan through SBA that was made between January 31, 2020 through the date the PPP loan refinance date)
    • For seasonal employers, the average total monthly payments for payroll should be for the 12-week period beginning February 15, 2019 or the period of March 1, 2019 to June 30, 2019 


  • $10 Million


  • Payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave
  • Employee salaries, commission, or similar compensations
  • Mortgage interest payments (not including prepayments or principal)
  • Rent (including rent under a lease agreement) and utilities
  • Any other debt obligations that were incurred before the covered period


  • Interest rates should not exceed 4 percent
  • Deferment of payment of principal and interest will be no less than 6 months and no more than 1 year
  • No origination fees
  • The maximum maturity of the loan less the reduction of loan forgiveness (discussed in following section) is 10 years from the date of loan forgiveness application to the loan
  • No personal guarantee or collateral will be required
  • No recourse to be taken against any individual shareholder, member or partner except in the case of misappropriate use of funds


An eligible recipient of a covered 7(a) loan under the PPP may be eligible for debt forgiveness in an amount equal to the “sum” of the following costs incurred and payments made during the “covered period”:

  • Payroll costs
  • Payments of interest on any covered mortgage obligation (not including prepayments or principal portion)
  • Payments on covered rent obligations under a lease agreement in force before February 15, 2020
  • Covered utility payments for the services of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

Note that for purposes of the loan forgiveness clause, the “covered period” is defined as the 8-week period beginning on the date of the origination of the covered loan.


Limitation #1: Forgiveness may not exceed the principal amount of the applicable loan

Limitation #2: There will be a reduction in the loan forgiveness “sum” determined above by multiplying it by the quotient of:

  • the average number of full-time equivalent employees (FTEs) per month employed during the covered period

-Divided by-

  • the choice of:
    • the average number of FTEs per month employed during February 15, 2019 and June 30, 2019; OR
    • the average number of FTEs per month employed during January 1, 2020 and February 29, 2020; OR
    • for a seasonal employer, the average number of FTE’s during February 15, 2019 and June 30, 2019

Note that calculation of average FTEs is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

Limitation #3: There will be a reduction in the loan forgiveness by the amount of any reduction in total salary or wages of any employee during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed preceding the covered period.

  • This definition of employee pursuant to this limitation is any employee who did not receive, during any single pay period in 2019, wages or salary that when annualized, would result in a total pay of $100,000 or more

Exemption for Re-Hires: The act further takes into consideration the potential for a temporary reduction in employees and/or salaries; therefore when calculating the loan forgiveness in relation to Limitations #2 & #3, one shall disregard the reduction in FTEs or salaries & wages that occurs from February 15, 2020 through 30 days past the official signature date of this Act, should the employer end the reduction in employees no later than June 30, 2020


  • Eligible recipients of 7(a) loans seeking forgiveness must submit their application with the lender of their original loan
  • Required documentation must include:
    • Verification of FTEs through payroll tax filings to the IRS (i.e. quarterly Form 941) and state income, payroll and unemployment insurance filings
    • Proof of costs used to determine loan forgiveness “sum” (i.e. cancelled checks, account transcripts, or other verification methods)
    • A certification that the documentation is true and that forgiveness requested was used to retain employees and pay for allowable costs under the loan as described previously
  • Applicants will receive a decision on their application no later than 60 days after the date submitted

Note that for the purposes of the Internal Revenue Code of 1986, debt forgiveness received in pursuant to this Act will not be considered gross income.

While this section of the CARES Act is a lot of information to digest, your trusted advisors at Stephano Slack are here to answer your questions and help you apply the current knowledge to your personal business circumstances.

Samantha Musser, CPA, Outsourced Accounting Manager

[email protected]

Ralph Cetrulo, CPA, Partner

[email protected]

Visit Stephano Plus