top of page

What Startups Need to Know About The CARES Act

What Startups Need to Know About the Care Act

Congress recently passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus plan to help cushion the coronavirus’ economic impact.

You can access the entire bill here, but we want to highlight three important items startups need to be aware of:

1. Small Business Lending Facility.

The CARES Act provides relief in the form of $350 billion in aggregate loans to be administered by the Small Business Administration (SBA) and its network of lending financial institutions, referred to as Paycheck Protection Loans. Each loan is intended to be used to cover an eligible borrower’s payroll, mortgage interest, rent and/or utilities expenses for up to eight weeks from origination of the loan. If borrower uses the loan for qualifying expenses while maintaining its workforce, some or all of the loan amount can be forgiven without negative credit or tax consequences. (Section 1101-1107)

Important Note to Venture-Backed Startups. Under ordinary circumstances, a borrower’s affiliates are considered by a lender when determining eligibility for an SBA loan. The CARES Act explicitly waives these SBA affiliation rules to the accommodation and food services industry; however, the new law is otherwise silent on how the affiliation rules apply to venture-backed companies. This has the potential to be problematic because it could cause lenders to group together unaffiliated portfolio companies of a single venture capital firm to determine whether a borrower has less than 500 employees. The NVCA sent a letter to Treasury explaining the potential implications.

2. Tax Deferral.

Employers are generally required to pay 6.2% in Social Security taxes on workers’ wages up to $137,700. This provision allows these tax payments to be deferred through the end of the year, with half of the deferred payments due by the end of 2021 and the other half by the end of 2022. (Section 2301)

Be careful though, firms that use this credit cannot access the small business lending facility.

3. Employee Retention Credit.

Companies that have seen operations either fully or partially suspended by government order or who have seen gross receipts fall by more than 50% in the quarter than compared with the same quarter the previous year, there is a refundable credit of 50% of wages paid up to a total of $10,000 per employee. (Section 2302)

Be careful though, a company may not receive both an Employee Retention Payroll Tax Credit and a Paycheck Protection Loan.

You can further explore into each of the sections of the CARES Act here.

The CARES Act is a complex and novel piece of legislation that will require significant interpretation in its application going forward. Over the coming weeks regulators will provide further guidance regarding the approved Paycheck Protection Program including with respect to the “Affiliation” issue that many startups could face. We'll do our best to keep you posted.

For more information on the different programs and eligibility check out the SBA Guide. In the meantime, here is our evolving list of Covid-19 Resources for Entrepreneurs and Gig Workers.

Stay safe and healthy. Virtual hugs,

- the Crew

bottom of page