CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020, was the largest economic relief package in U.S. history, providing approximately $2.2 trillion to support businesses, workers, and the healthcare system during the COVID-19 pandemic. For businesses, the most significant provisions included the Paycheck Protection Program (PPP), which provided forgivable loans to small businesses to cover payroll, rent, utilities, and mortgage interest—with loan forgiveness conditioned on maintaining employee headcount and compensation levels. The Employee Retention Credit (ERC) offered refundable payroll tax credits to employers who continued paying employees during shutdowns or significant revenue declines. Economic Injury Disaster Loans (EIDL) provided long-term, low-interest financing for businesses with pandemic-related economic injury. For larger businesses, the Act established several Federal Reserve-administered lending facilities. Tax provisions included the ability to carry back net operating losses from 2018–2020 up to five years, relaxation of the business interest deduction limitation under Section 163(j), and accelerated depreciation for qualified improvement property corrected by the CARES Act's technical fix to the Tax Cuts and Jobs Act. Finance professionals involved in COVID-era financial planning need to understand these provisions for ongoing compliance, amended return opportunities, and audit preparation.

The Paycheck Protection Program (PPP) under the CARES Act provided federally backed, forgivable loans to small businesses (generally with 500 or fewer employees) through SBA-approved lenders. Loan amounts were calculated at 2.5 times the borrower's average monthly payroll costs (3.5x for hospitality and food service businesses in the second round), with a maximum loan of $10 million per borrower. The defining feature of PPP was its potential for full loan forgiveness: if borrowers used at least 60% of loan proceeds on eligible payroll costs and the remaining 40% on covered non-payroll expenses (mortgage interest, rent, utilities, and later expanded categories), and maintained employee headcount and compensation levels during the covered period, the entire loan balance could be forgiven. Forgiveness was not automatic—borrowers had to apply through their lender, submitting payroll records, tax filings, and other documentation. Unforgiven loan balances carried a 1% interest rate with a two- or five-year maturity. A significant tax development: the IRS initially ruled that expenses funded by forgiven PPP loans were not deductible, but Congress reversed this in the Consolidated Appropriations Act of 2021, confirming that forgiven loan amounts are tax-exempt and the associated expenses remain deductible—a significant double benefit for qualifying borrowers.

The Employee Retention Credit (ERC) established by the CARES Act was a refundable payroll tax credit designed to incentivize employers to retain employees during the pandemic. In its original form, eligible employers who either had operations fully or partially suspended by a government order, or experienced a significant decline in gross receipts compared to 2019, could claim a credit of 50% of qualified wages up to $10,000 per employee per year (a maximum credit of $5,000 per employee for 2020). Subsequent legislation—the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act—significantly expanded the ERC for 2021, increasing the credit rate to 70% of qualified wages up to $10,000 per employee per quarter (a maximum of $28,000 per employee for 2021) and lowering the gross receipts decline threshold. Businesses can claim the ERC retroactively by filing amended payroll tax returns (Form 941-X). However, the IRS issued a moratorium on processing new ERC claims in 2023 due to widespread fraud concerns, and created a voluntary disclosure program for businesses that received questionable ERC refunds. Finance professionals advising clients on ERC claims must carefully document eligibility, ensure the claim does not conflict with PPP loan forgiveness treatment, and be prepared for potential IRS audit activity given the heightened scrutiny applied to this credit.

The CARES Act included several significant tax provisions that created planning opportunities extending beyond the immediate pandemic period. The net operating loss (NOL) carryback provision temporarily restored the ability to carry back NOLs generated in tax years 2018, 2019, and 2020 up to five years—a valuable opportunity to recover taxes paid in prior profitable years at potentially higher pre-TCJA rates. Businesses with NOLs from those years that have not yet filed for carryback refunds should evaluate whether amended returns are still available. The Act temporarily modified the business interest expense limitation under Section 163(j), increasing the deductibility limit from 30% to 50% of adjusted taxable income for 2019 and 2020, benefiting highly leveraged businesses. The technical correction of the Qualified Improvement Property (QIP) depreciable life to 15 years—making QIP eligible for 100% bonus depreciation retroactively—created significant refund opportunities for businesses that had made interior improvements to nonresidential property. Individual provisions included waiver of the 10% early distribution penalty for retirement account withdrawals up to $100,000 for COVID-affected individuals in 2020, with a three-year income inclusion option. While most CARES Act provisions have sunset, their effects on tax years 2018–2021 continue to create amended return opportunities and audit considerations that finance professionals must understand.

While the CARES Act relief programs were designed for rapid deployment during an emergency, their compliance requirements remain active and subject to government scrutiny well beyond the pandemic period. PPP loan recipients are subject to SBA audit for loans over $2 million and selective review of smaller loans, with the government examining the accuracy of the borrower's eligibility certification, the calculation of loan amounts, and the proper use of proceeds. Fraudulent PPP claims—including certifications of eligibility that were not supported by actual facts—remain subject to criminal and civil prosecution under the False Claims Act, FIRREA, and wire fraud statutes, with no statute of limitations on fraud. ERC claims face heightened IRS scrutiny following widespread promoter-driven fraud; the IRS has announced that it is actively auditing large ERC claims and has pursued criminal referrals against promoters who facilitated improper claims. Businesses that amended payroll tax returns to claim ERC refunds should maintain comprehensive documentation of eligibility—including government orders, financial statements demonstrating revenue declines, and calculations of qualified wages. The IRS voluntary disclosure program offered businesses with questionable ERC claims a structured path to return a portion of improperly received funds with reduced penalties. Finance professionals should assess clients' ongoing exposure from CARES Act programs and ensure appropriate documentation is retained for the applicable statute of limitations period.