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COVID-19 Relief Provisions for Mid-Sized Businesses

Posted: 04/03/2020
Services: Corporate

This Alert summarizes key benefits and considerations for mid-sized companies under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

  • Mid-Sized Business Direct Loan Program (Mid-Sized Loan Program). Under the Mid-Sized Loan Program, an “eligible business” with 500 to 10,000 employees will be able to apply for loans to cover payroll costs. Interest rates on the loans are capped at two percent. These loans come with significant conditions, however, including a restriction on the payment of dividends to shareholders and the buyback of stock, a requirement that the business remain neutral in any union organizing efforts during the term of the loan and restrictions on compensation payable to top-earning employees. As of April 2, 2020, no details of the Mid-Sized Loan Program have been released.
  • Employee Retention Credits (Retention Credits). In addition to any loans under the Mid-Sized Loan Program, an employer who has had to reduce or suspend operations due to COVID-19 can claim a refundable tax credit of 50 percent of the qualified wages paid to employees, up to $10,000 of wages per employee (for a maximum credit of $5,000 per employee). The credit is based on qualified wages paid to employees who are not providing services.
  • Enhanced Unemployment Benefits. The federal government has added $600 per week to unemployment benefits. As a result, lower paid employees may make more money if they are laid off. However, layoffs could render a business ineligible for the Mid-Sized Loan Program.
  • Payroll Tax Deferral. Payroll tax payments due in 2020 for the employer portion of Social Security tax may be deferred until 2021 and 2022.
  • Tax Relief. Various tax provisions provide income tax relief for 2020 and, in some cases, prior years. This includes fixing the so-called “retail glitch,” permitting the carryback of net operating losses and expanding the deductibility of business interest expense.

Detailed Discussion of Relevant Provisions of the Act

Mid-Sized Loan Program


The Act authorizes a lending program to provide financing to banks and other lenders to make direct loans to “eligible businesses” with 500 to 10,000 employees. The primary purpose of the Mid-Sized Loan Program is to help borrowers keep at least 90 percent of their workforce employed at full compensation and benefits through September 30, 2020. As of April 2, 2020, procedures for the Mid-Sized Loan Program have not been issued, but we will provide updates once they are available on the U.S. Treasury website.

Definition of an “eligible business”

An “eligible business” is defined as a U.S. business, including a nonprofit organization, that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the Act. The Act does not state whether the employee headcount requirement applies with respect to each legal entity in a company group or on a consolidated basis, but based on our review of other provisions of the Act, it is likely that company groups with common ownership and/or management would be treated as a single entity for this purpose.

Direct loan terms and conditions

The Act provides the following terms and conditions for the Mid- Sized Loan Program:

  • Loans will carry a maximum annual interest rate of two percent.
  • No principal or interest payments will be due on direct loans for the first six months after the loan is made (or such longer period determined by the Secretary of the Treasury). 
  • Loans must be sufficiently collateralized.
  • Loans are not eligible for reduction through loan forgiveness. This is a major difference between the Mid-Sized Loan Program and the Paycheck Protection Program discussed in our small business alert.
  • High-wage employee compensation limits set forth in Title IV of the Act must be complied with (see below).

The Act is silent with regard to other loan terms and conditions, such as maximum loan duration and maximum loan amount, but provides that appropriate covenants, representations, warranties and other requirements are to be established by the Secretary of the Treasury. 

Conditions and Restrictions

The loans provided under the Direct Loan Program come subject to important conditions and restrictions that must be carefully considered. Any business applying for a direct loan under the Mid-Sized Loan Program must make a good-faith certification of compliance with each of the following conditions:

  • Uncertain economic conditions existed on the date of the loan application and the loan is necessary to support the applicant’s ongoing operations. 
  • It will not pay dividends on its common stock, nor will it repurchase its own or any parent company’s equity securities that are listed on a national exchange while the loan is outstanding, unless required to do so under a contractual obligation in existence on the date of enactment of the Act. 
  • It will not abrogate an existing collective bargaining agreement during the term of the loan or within two years after repayment of the loan, and it will remain neutral in any union organizing efforts during the term of the loan. 
  • It intends to restore not less than 90 percent of the workforce that existed as of February 1, 2020, including restoring all compensation and benefits to those workers, within four months after the termination of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020, in response to the COVID-19 pandemic.
  • The loan proceeds will be applied to retain at least 90 percent of its workforce at full compensation and benefits until September 30, 2020.
  • It is domiciled in the United States, with significant operations in the United States and a majority of its employees in the United States. 
  • It will not outsource or offshore jobs for the term of the loan and for two years after repayment of the loan.
  • It is not a debtor in a bankruptcy proceeding.

Uncertainty about prohibition on dividend payments

It is uncertain how the prohibition on the payment of “dividends on common stock” would apply to S corporations or entities taxed as partnerships. In the “best case” scenario, the Treasury Department may clarify that the restriction on dividends only applies to entities taxed as C corporations. In the “worst case” scenario, Treasury may interpret the term “dividends” very broadly and try to prevent S corporations (and perhaps even entities taxed as partnerships) from making tax distributions to their owners. A common-sense alternative would be to permit S corporations and entities taxed as partnerships to make tax distributions to their shareholders, members and partners, but restrict distributions in excess of this amount. It is unclear whether Treasury would have the authority to take this alternative position without a technical correction of the Act.

High-wage employee compensation limits

Under the terms of the Act, borrowers face some limits on pay for high-wage employees during the term of the loan and for one year after it is fully repaid.

No officer or employee of an eligible business whose total compensation exceeded $425,000 in calendar year 2019 can receive: (a) total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; and (b) severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019.

Additionally, no officer or employee of the eligible business whose total compensation exceeded $3 million in calendar year 2019 will receive from the eligible business during any 12 consecutive months of such period total compensation in excess of the sum of: (a) $3 million; and (b) 50 percent of the excess over $3 million of the total compensation received by the officer or employee from the eligible business in calendar year 2019. The term “total compensation” includes salary, bonuses, awards of stock, and other financial benefits provided by an eligible business to an officer or employee of the eligible business.

Employee Retention Credits


The employee retention credit is a refundable tax credit equal to 50 percent of the qualifying wages paid by an eligible employer from March 13, 2020 through the end of 2020. The retention credit may not be claimed by a small business (generally, a business with not more than 500 employees) that applies for and obtains an SBA loan under the Paycheck Protection Program established under the Act, but it is available for mid-sized businesses who apply for and obtain loans under the Mid-Sized Loan Program.


The retention credit is available to (a) employers (including tax-exempt employers) that were operating in 2020, but have closed or reduced their operations due to orders from an appropriate governmental authority due to COVID-19, or (b) employers (other than tax-exempt employers) if their gross receipts for any calendar quarter beginning after December 31, 2019 are less than 50 percent of their gross receipts for the same calendar quarter in the prior year. If the credit is based only on the reduction in gross receipts, the credit will discontinue with the first calendar quarter after the employer’s gross receipts are greater than 80 percent of the gross receipts in the same calendar quarter in the prior year. Governmental employers are not eligible.

Amount and Use of Retention Credit

Employers will receive a credit in the amount of 50 percent of the “qualified wages” (including health care costs) with respect to each employee, up to $10,000. The maximum credit is thus $5,000 per employee. The retention credit is applied against the employer share of Social Security taxes. If the amount of the credit exceeds the Social Security taxes paid by the employer, the remaining credit will be refundable.

For employers with more than 100 full-time employees in 2019, the tax credit is based on qualified wages paid to any employee who is not providing services during the calendar quarter for which the tax credit is claimed. If an employee is receiving full-time pay for working only part-time, the wages for which the employee is not performing services should be qualifying wages for purposes of the credit.

For purposes of determining if an employer has more than 100 full-time employees, entities under common control or in an affiliated service group will be treated as a single employer.

Claiming the Credit

Employers who pay qualified wages can reimburse themselves the amount of the credit by retaining amounts of federal employment taxes that would otherwise have been paid to the IRS on quarterly employment tax returns (Form 941) for wages paid between March 13, 2020 and December 31, 2020. If there are insufficient payroll deposits to cover the cost of qualified wages, employers will be able to file a request with the IRS (on IRS Form 7200) for an accelerated payment (the IRS anticipates to process these requests within two weeks of receipt). IRS Guidance on the retention tax credits was issued on March 31, 2020.

Appropriate documentation must be retained by the employer to support the tax credit.

Enhanced Unemployment Benefits

The Act greatly increased unemployment benefits by expanding eligibility, increasing the payments and lengthening the time the benefits are available. (Unemployment insurance is a state-level program with differing eligibility and benefits. The Act induces states to accept the enhanced benefits by offering to pay for them.) Employees, independent contractors and self-employed individuals will now be eligible for the benefits if they are out of work for various COVID-19-related reasons, including that their employer has shut down. State level benefits will be increased by $600 per week until July 31, 2020. Finally, the federal government will provide an additional 13 weeks of benefits on top of the state program, up to a cap of 39 weeks. Employers should discuss with their employees whether these enriched unemployment benefits might be more valuable than staying employed, though employers seeking to take advantage of the Mid-Sized Loan Program must bear in mind the 90 percent employee retention requirement under that program.

Payroll Tax Deferral

Employers and self-employed individuals will be able to conserve some cash by deferring the required deposit of the employer portion of the social security tax (6.2 percent) for 2020. In general, an employer must make at least monthly deposits of its portion of the social security tax (with similar rules for self-employed individuals). The Act allows employers to defer any payments that would have been made from March 27, 2020 until December 31, 2020 until a later date. Half of the total amount deferred is due on December 31, 2021 and the other half is due on December 31, 2022. It is important to note that the payroll tax deferral cannot be used in conjunction with the PPP loans that are intended to be forgiven.

Tax Relief

To provide businesses with more cash, the Act has modified a number of existing tax provisions, some with retroactive effect. A significant number of the provisions were changes to the 2017 Tax Cuts and Jobs Act (TCJA). The retroactivity of the changes will allow some business to file amended returns and receive refunds.

  • Retail Glitch. An error in the TCJA limited the ability of taxpayers to expense “qualified improvement property” (QIP). Retroactive to 2018, QIP placed in service from the 2018 taxable year and going forward can be expensed, thus reducing the business’s tax burden. 
  • NOLs. The TCJA eliminated the ability to carry back a net operating loss (NOL) to prior years and limited NOL carryforwards to 80 percent of taxable income. The Act allows NOLs created in 2018, 2019 or 2020 to be carried back five years and suspends the 80 percent limitation until 2021. Corporations that had tax losses in 2019 but taxable income in prior years generally should file 2019 returns as soon as possible to take advantage of this expanded carryback and get cash refunds in hand.
  • Excess Business Losses. NOLs generated by noncorporate taxpayers were limited by the TCJA to a cap of $250,000 ($500,000 if filing a joint return). The limitation is suspended for 2018, 2019 and 2020.
  • Deductibility of Business Interest Expense. The deduction for business interest expense was limited by the TCJA to 30 percent of a taxpayer’s “adjusted taxable income.” This limitation was raised to 50 percent for 2019 and 2020 (with special rules for partnerships). Additionally, the 2020 limitation can be based off of the taxpayer’s 2019 adjusted taxable income (since the 2020 number may be significantly lower). 
  • AMT. The corporate alternative minimum tax was repealed by the TCJA which left some taxpayers with AMT credit carryforwards. The Act accelerates any remaining credit carryforwards.