The Coronavirus Aid, Relief and Economic Security (CARES) Act Becomes Law – With Major Enhancements

Financial Industry Alert

By voice vote on March 27, the House of Representatives passed the Coronavirus Aid, Relief and Economic Security Act (the “Act”), a version of which the Senate passed on a 96-0 vote two days earlier. President Trump promptly signed the Act into law. The Act includes significant amendments to the Senate bill resulting from legislative negotiations that took place since we last analyzed it here. The final version of the Act increases funding for loans to small and large businesses, increases oversight on the Department of the Treasury’s loans and grants to businesses, and adds funding for struggling state, tribal and local governments, individuals and healthcare providers. We summarize key changes below.

New Small Business Relief Funding and Conditions

The following is only a brief summary of the Small Business Administration provisions of the Act. For a detailed discussion, click here.

The Act increases funding for SBA loans from the $300 billion approved by the Senate to $349 billion, with separate appropriations for administrative overhead, and makes loans on the following modified terms available until June 30, 2020: It waives requirements that borrowers provide personal guarantees and loan collateral and that they be unable to seek credit elsewhere, and makes the loans nonrecourse to the extent the proceeds are used for the purposes authorized by the Act. The SBA will fund 100% of each loan. The maximum loan amount still is $10 million, and allowable uses are for the payment of payroll, benefits (including healthcare benefits during period of paid sick, medical or family leave), mortgage interest, rent, and utility obligations that arise between February 15, 2020 and June 30, 2020 (known as the “covered period”). The Act includes a new requirement that each loan recipient make a good faith certification that the loan is necessitated by the present economic situation, and that the loan recipient will use the borrowed funds to retain workers, maintain payroll, or make mortgage interest, lease and utility payments.

Maximum allowable employee headcount is expanded to 500 employees, with exceptions for certain businesses in the foodservice, hospitality and other industries that typically have higher staffing headcounts. The Act continues to provide for forgiveness of loan amounts spent on payroll, and also on rent, mortgage interest, or utilities provided that such obligations were in force before February 15, 2020. The borrower must incur these payroll and other costs during the eight-week period that began on the date that the loan originated.

New Funding and Conditions for Economic Stabilization Measures

Funding for Department of the Treasury loans to businesses impacted by the coronavirus pandemic is increased from the Senate’s $150 billion to $500 billion, which includes roughly $58 billion for passenger and cargo airlines. Borrowers are required to maintain their March 24, 2020 staffing levels through September 30, 2020 to the extent practicable, are prohibited from reducing such staffing levels more than 10% than March 24, 2020 levels, and are barred from stock buybacks during the loan term and for one year thereafter unless previously obligated by contract to do so. The Act prohibits the Treasury from forgiving these loans, provides for an inspector general and legislative oversight of the lending process and use of borrowed funds, and prohibits the President, Vice President, Cabinet members, members of Congress, and the members of all of their immediate families from benefiting from these loans.

The Act makes several significant changes to the Internal Revenue Code that enable large and small businesses to reduce their tax liabilities. Business taxpayers may carry-back tax losses that arose in the 2018, 2019 and 2020 tax years for up to five years. And there are no taxable income limitations on such carry-backs for tax years beginning before January 1, 2021. The Act also fixes an error in the current tax code that required retailers to depreciate expenses related to physical improvements on a 39-year schedule; such expenses now may be written off immediately.

Additional Bankruptcy Relief

The Act now includes some temporary changes to the Bankruptcy Code that will enable more businesses to take advantage of the expedited and streamlined chapter 11 procedures available to small business debtors pursuant to the August 2019 amendments to the Bankruptcy Code that became effective last month. See 11 U.S.C. § 1181 et seq. Specifically, § 1113 of the Act amends the Bankruptcy Code’s gating definition of a small business debtor by increasing the maximum allowable indebtedness of such a debtor from $2 million to $7.5 million. This change applies only to bankruptcy cases commenced after the date of the enactment of the Act, and sunsets one year after its enactment.

New State and Municipal Government Assistance

Public agencies and governments have been doubly-impacted by the coronavirus pandemic, which has increased expenditures on public safety and public health while simultaneously reducing revenues from sales and income taxes. The Act now provides more than $320 billion in funding for state, territorial, tribal and municipal governments to address these problems. A $150 billion relief fund will help state, local and tribal governments pay for coronavirus-related costs incurred between March 1, 2020 and December 30, 2020. Funding to states varies based on population, with each state receiving a minimum of $1.25 billion. Such payments must be made within 30 days of enactment of the Act, with payments to municipalities being disbursed directly rather than through state governments. The Act also provides more than $270 billion to state, tribal and local governments through other existing programs, including $1.5 billion in economic development grants for communities affected by the crisis, $850 million in grants to first responders, $345 million to reduce public employee layoffs, $1.5 billion for public health programs, $3.5 billion for child care programs, $13.5 billion to mitigate disruptions to elementary and secondary education, and $25 billion for public transit providers’ operating and capital expenditures. With many governments already experiencing financial duress before this crisis due to pension and other legacy liabilities, declining tax bases, and infrastructure costs, public officials have been outspoken about their concerns that the pandemic would strain their governments’ solvency. While many of these challenges require solutions that are larger in scope and scale, hopefully the Act will help them to avoid near-term borrowing defaults and to continue providing important public services until longer term solutions can be found.

Additional Aid for Individuals

In addition to the cash payouts to individuals described in our last report, the Act added additional financial assistance for individuals impacted by the pandemic, including the ill and their caregivers, those who cannot work due to quarantines or caring for children who are not in school, those who become heads of their households, and those whose employment has been terminated. These individuals will receive $600 per week in federal unemployment compensation, in addition to state unemployment benefits that they would otherwise receive, and up to 13 weeks of emergency benefits if they exhaust their entitlement to 39 weeks of state unemployment benefits. Self-employed workers and freelancers, who typically do not qualify for state unemployment compensation, can receive federal unemployment assistance payments through the end of 2020 if they lose work as a result of the pandemic. The Act also provides funding for states’ partial-unemployment compensation programs in order to encourage employers to avoid layoffs by placing employees on reduced schedules. It also enables employers to pay $5,250 of employees’ student loans on a tax-free basis before January 1, 2021, and requires healthcare plans to pay for beneficiaries’ coronavirus testing, treatment and vaccines.

Healthcare Funding

The Act allocates approximately $150 billion to improve healthcare providers’ capacity to provide treatment during the pandemic, expands stockpiles of protective equipment, and funds federal public health programs and vaccine research. This funding will increase access to coronavirus testing and treatment and resolve of some of the difficulties that healthcare providers have had with obtaining supplies and providing treatment.


The Act provides significant funding to mitigate the most immediate financial consequences of the coronavirus pandemic and hopefully will inspire some confidence that it can be contained such that the economy can avoid a liquidity crisis. However, financial markets are likely to require some time to process the effects of placing such large amounts of cash so quickly into an economy that is operating at suboptimal efficiency. Additionally, our experiences with the 2008 financial crisis have taught us to expect that policymakers and financial institutions will need to take further measures to address economic problems that are likely to develop as consequences of the pandemic’s systematic impact on the national and global economies.