What Startups Need to Know About The CARES Act

In just a few weeks, the COVID-19 pandemic has dramatically reshaped life and business as we know it. Founders are making tough decisions daily, to support their teams, stay afloat, and plan for a future that still feels uncertain. In response to the growing crisis, Congress recently passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2 trillion stimulus package that includes emergency funding and resources for small businesses and startups.

We know the rollout has been fast-moving and confusing. That’s why we pulled together this overview to help founders understand what’s available, what to expect, and where to take action. While the full legislation is complex, we want to highlight three key programs startups need to be aware of and what they might mean for you.

1. Small Business Lending Facility

The CARES Act includes $350 billion in emergency loans administered by the Small Business Administration (SBA) through its existing network of lenders. These loans, known as Paycheck Protection Program (PPP) loans, are designed to help businesses keep employees on payroll during the early months of the COVID‑19 crisis.

PPP loans can be used to cover:

• Payroll costs

• Mortgage interest

• Rent

• Utilities

  
  

These expenses must be incurred during the eight weeks following loan origination. If a business uses the loan for eligible expenses and maintains its workforce, some or all of the loan may be forgiven, with no negative tax or credit consequences. (Sections 1101–1107)

Important Note to Venture-Backed Startups.

Under normal SBA rules, a borrower’s “affiliates” are considered when determining loan eligibility. The CARES Act explicitly waives these affiliation rules for the accommodation and food services industry, but it does not clearly address how they apply to venture‑backed companies. This creates uncertainty for startups backed by venture capital firms, as lenders may group together multiple portfolio companies under a single fund when calculating employee count. That could make some otherwise eligible startups appear too large to qualify. The National Venture Capital Association (NVCA) has formally raised this concern with the U.S. Treasury, and additional guidance is expected.

2. Payroll Tax Deferral

Employers are typically required to pay a 6.2% Social Security payroll tax on employee wages (up to $137,700). The CARES Act allows businesses to defer these payments through the end of 2020.

• Half of the deferred amount is due by the end of 2021

• The remaining half is due by the end of 2022

  
  

This provision is intended to improve short‑term cash flow during the crisis. (Section 2301)

Important note

Businesses that receive a Paycheck Protection Program loan are not eligible to use this payroll tax deferral.

3. Employee Retention Credit

The CARES Act also introduces an Employee Retention Payroll Tax Credit for businesses that have been significantly impacted by COVID‑19.

Eligible companies include those that:

• Have had operations fully or partially suspended due to government orders, OR

  
  

• Have experienced a 50% or greater decline in gross receipts compared to the same quarter in the previous year

  
  

Qualifying employers may receive a refundable tax credit equal to 50% of wages paid, up to $10,000 per employee. (Section 2302)

Important note

Companies cannot receive both the Employee Retention Credit and a Paycheck Protection Program loan.

What Startups Should Watch For Next

The CARES Act is a large and complex piece of legislation, and many details are still being interpreted. Additional guidance from regulators, particularly around PPP eligibility and affiliation rules, is expected in the coming weeks. As more information emerges, it’s important for founders to stay aware, reassess their options, and make decisions based on the most current information and resources available. Taking the time to understand how these programs evolve can help you avoid missteps and better position your business as conditions change.