Lending Provisions Found in Title I: Keeping American Workers Paid and Employed Act

by | Mar 29, 2020

NOTICE – As of April 2, the Treasury Department has posted a fact sheet for borrowers to consider that will answer some details not known at the time of this article.  For additional information, please visit the Treasury website, click here

New Lending Provision Known as CARES-7(a)

Last week Congress provided relief for Americans, businesses, and healthcare institutions through a record stimulus deal in response to the COVID-19 pandemic, The Coronavirus Aid, Relief, and Economic Security Act (CARES).  The Senate passed H.R. 748 Wednesday March 25, 2020, later approved by the House on Friday March 27, 2020, and ultimately signed by the President on March 27, 2020.

Lending Provisions found in Title I: Keeping American Workers Paid and Employed Act

The majority of the Keeping American Workers Paid and Employed Act is focused on lending to small businesses to allow for payroll to be maintained during the COVID-19 pandemic.  We will address only the loan provisions informally known as CARES-7(a). Future installments will address  other major components of The Coronavirus Aid, Relief, and Economic Security Act (CARES).  You may access the full text of the law at the following link: https://www.congress.gov/bill/116th-congress/house-bill/748/text/enr?q=%7B%22search%22%3A%5B%22hr748%22%5D%7D&r=1

The most impressive section of Title I focuses on relief for businesses with fewer than 500 employees, including self-employed individuals and nonprofits.  The Title refers to these loans as “paycheck protection loans” and are very generous in terms.  Additionally, there are provisions in the bill that allow for certain loans to be forgiven.  For those qualifying businesses, it will be hard to find reasons not to seriously consider applying for this loan.    


The Act defines eligible businesses very specifically. If the organization was in operation on February 15, 2020, had employees for whom salaries and payroll taxes were paid or independent contractors, and employs less than 500 employees, it is an eligible business.  Unique to this loan as compared to other SBA loans, the Act also extends the potential of a covered loan to sole proprietors, independent contractors, and eligible self-employed individuals, to include the “gig” worker economy.

Employee Count

The Act defines employee count in a unique way.  When defining 500 employees, it states that any employee, whether full-time, part-time, or other basis is to be counted.  It also states that if the business meets the size standards as defined by the Small Business Administration for its industry, it can apply.  Also uncommon to this definition is that businesses who fit in code 72 of the North American Industry Classification System (NAICS) are granted the ability to count each physical location separately.  Code 72 generally includes the restaurant industry.

Allowable Loan Amount

The Act sets aside $349 billion for these loans and the SBA will participate 100% in these loans. Barring a few minor exceptions, the maximum loan amount under the Act is derived by taking the average monthly payroll related costs, excluding compensation in excess of $100,000, for the 1-year period preceding the loan date and multiplying by 2.5.  From that number any disaster loan already taken under EIDL January 31, 2020 or after is added to the provisional loan amount.  The maximum loan amount cannot exceed $10 million.

Allowable Uses

The funds can be used for payroll costs, benefits, rent, utilities, and interest on any debt obligation incurred before the covered period.

Loan Forgiveness

In certain circumstances, these loans can be forgiven.  In general, the period beginning on the loan date and ending 8-weeks from that date will be used.  Expenses such as payroll costs, interest, rent, and utilities are added together.  From that total, a ratio of FTE employees is derived based on specific reporting dates.  Generally, employees that are paid in excess of $100,000 are excluded from this calculation.  From that multiple the SBA will forgive that portion of the loan. 

The borrower will be able to choose the FTE count.  The choices are either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. Employers with tipped workers may receive forgiveness for additional wages paid to those employees. For those employers with workers who have already been laid off or experienced reduced pay, there is a re-hire exemption if corrected by June 30, 2020.

Once documentation is submitted, the lender has 60 days to make such a determination on the validity of forgiveness documentation. We want to point out that this forgiveness will be excluded from gross income for taxation purposes.  We believe it’s important to repeat this statement.  Loan forgiveness will be excluded from taxable income.

The remaining balance not forgiven could have a repayment term not to exceed 10 years and will be determined at the time of the forgiveness amount validation.

What’s the catch?

Does this sound too good to be true right?  There really are not many negatives.    

Are they recourse? No.

Are there fees? Not as many as normal SBA loans and the guarantee and annual fees are waived along with fees and penalties for early repayment.

Are there personal guarantees or collateral requirements? Not during the covered period.

Can I apply if I have credit at another institution? Yes.

The interest rate must be high? The Act directs that the loans should not bear interest above 4 percent.

I won’t have the funds to start repaying this loan immediately. It’s okay, the Act requires that payments are deferred for 6 to 12 months, which includes principal, interest, and fees.

I already applied for and accepted a loan made under 7(b)(2) EIDL Disaster Loan.  Can I have both? The EIDL loan may be refinanced into this loan as the maximum allowable loan amount for the CARES 7(a) loan includes components for the inclusion of the principal outstanding on an EIDL loan originated on or after January 31, 2020.  You are prohibited from applying to both at the same time. 

Can I take the Employee Retention Credit (payroll tax credit for employers subject to closure)? No.

Can I delay the payment of employer payroll taxes to December 31, 2021 and December 31, 2022 as provided under this law? No.

Where to go to apply

The Act allows the Small Business Administration and Secretary of the Treasury to extend the loan application process and administration to qualified lenders. As such, contact your lender or feel free to reach out to your primary KHA contact for referrals.

What may be most impactful for the small business owner is knowing the options available to you for loans, possible grants, and existing SBA loans. Also, in the event you do have to lay off employees, or already have, there are provisions for Unemployment Insurance in Title II of the Act.  Future installments will cover other provisions of the CARES Act.

As your trusted advisors, we are committed to keeping you well-informed with any new legislation passed by Congress as well as any new pronouncements by the Department of Treasury that may affect you. Please do not hesitate to reach out to KHA with any additional questions you may have.  

These sources are simply included for informational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. This by no means is a recommendation to obtain a loan or attempt to apply for a loan. There are many unknowns at this time regarding what other stimulus (grants or other loan options) that may become available with pending and future bills, executive orders, or emergency declarations to follow, that may become laws. Consult your legal and business advisors prior to making financing decisions. This is intended for illustrative and discussion purposes only.

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