~9 minute read
Tricia Dunlap, Esq. 

On March 31, 2020, the Treasury Department issued guidance documents  to assist banks and business owners in accessing the CARES Act Paycheck Protection Program (PPP)(see my guide to the CARES Act). The SBA issued interim regulations on April 2nd.

On March 31st, when I first read Treasury’s guidance, I thought to myself “Oh no!
These guidance documents will influence the SBA’s regulations and micro businesses
will suffer.” Sure enough, I was right. Though definitions vary, micro businesses generally
have fewer than five employees and assets under $250,000 annually as compared to
small businesses that have fewer than 500 employees and under $1 million in assets

Microbusinesses tend to be younger than small businesses and owners of
microbusinesses tend to hail from historically disadvantaged groups: women, racial and
ethnic minorities, veterans, or they operate in rural or underserved areas.
Microbusinesses struggle to access capital even in good economies. They also tend to
rely heavily on independent contractors because micros don’t have the human resources
bandwidth or sufficient capital to support employees. They are badass bootstrappers
whose tenacity and resilience are drawn from the deep ancestral well of American

I’ve got a dog in this fight because my little law firm is a microbusiness too. At age
40, I left teaching for law school. After a stint in Big Law, I started Dunlap Law in 2015
with $13,000 in savings. I am now 51 years old. Dunlap Law is my life’s work and my
future. It is the sum total of untold hours of work, worry, scrapping, and striving. I throw
my heart into it every day, representing and advocating for my fellow bootstrappers.
That’s why I’m pissed. Even though Congress intended for micro businesses to
be at the front of the line for PPP loans, we got screwed by Treasury and the SBA.

Here’s how:

1. Incorrect Definition of “Payroll Costs” 

How “payroll costs” is defined is a very big deal because it determines:  (i) how much money a business can get under the PPP loans; (ii) what businesses can spend the loan funds on; and (iii) how they qualify to have a portion of the PPP loan forgiven. 

The CARES Act Sec. 1102(a)(viii)(I) defines “payroll costs” to include “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation . . . “  (that’s at paragraph (bb)).   Here’s that section 

Cares act

Breaking that down, here’s how it should be read:  

“the sum of payments of any compensation to or
Income of a
Sole proprietor or
independent contractor [and]
That is a wage, commission, income, net earnings from self-employment or similar compensation . . .”

Therefore, the CARES Act includes payments from a small business to independent contractors in its definition “payroll costs.”  This is a VERY big deal for micro-businesses that often rely on independent contractors.   

Yet, Treasury’s Information Sheet for Borrowers does not include payments to independent contractors in its definition of payroll costs.  Instead, Treasury says:  “For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.”  This is just flat wrong. 

In its regulations, SBA asserts that payroll costs should not include payments to
independent contractors because those independent contractors are themselves eligible
for PPP loans. But the SBA fails to understand that under its rule, microbusinesses won’t
have resources to pay their contractors. The inevitable result is painful disruptions in
operations and profound impairment of the micro’s ability to recover and spool up
operations once the crisis abates. Elsewhere in the SBA regulations, SBA asserts that
the “overarching focus [of the CARES Act is] on keeping workers paid and employed.”
By carving payments to contractors out of payroll costs, the SBA undermines the CARES
Act’s ability to achieve its mission

2. Priority to Certain Businesses 

The CARES Act (Sec. 1102(a)(P)(iv) expresses the “Sense of the Senate” that certain businesses should be at the front of the line for priority processing of PPP loans. Including small businesses: 

  1. In operation for less than 2 years; or 
  2. Owned by veterans, women, or socially and economically disadvantaged individuals; or
  3. Operating in underserved and rural markets. 

Screenshot 2020 04 21 12. 20. 46





The CARES Act does not entitle “small businesses and sole proprietorships” to priority processing over “independent contractors and self-employed individuals.”  Yet, in its guidance documents, Treasury invented a completely arbitrary distinction between these small business types and created an application timeline that gives priority to small businesses and sole proprietorships.  Those applicants can file their applications on April 3rd, one week before independent contractors and self-employed individuals are allowed to file (April 10th).  This despite the fact that a self-employed individual may be entitled to priority as a veteran, or woman, or because they’re operating in underserved and rural markets and thus should have priority over small businesses that do not meet these criteria.   

Treasury/ SBA regulations ignored this mandate in the Act in favor of “first come, first served” protocol.  As a result, the biggest most well-connected “small businesses” hoovered up most of the money.  This is why Ruth’s Chris was able to get $20 million and Shake Shack (with 7,600 employees and 2019 net profit of $24 million) was able to get $10 million before many others even had their applications considered.

Treasury, you got it wrong! 

3. Maximum Loan Amount 

The CARES Act Section 1102(a)(E) allows for a maximum loan amount of the product of the applicant’s average total monthly payments . . . for payroll costs incurred during the 1-year period before the date on which the loan is made . . . multiplied by 2.5.  Here’s the CARES Act language, below: 

Maximum loan amount

Treasury’s Information Sheet for Borrowers says loans can be for “up to two months of your average monthly payroll costs from the last year plus an additional 25% of that amount.”  This does not reflect CARES Act language which uses a 1-year lookback of average total monthly payroll costs.   Combined with Treasury’s incorrect and more restrictive definition of “payroll costs”, borrowers are unlikely to get the amount of help that Congress intended them to get. 

Sole proprietors

4. Payment Deferral Period 

The CARES Act requires payment deferment for the first six months of the loan but it allows deferment for up to a year.  CARES Act Section 1102 (a)(M)(ii)(II). 

Treasury’s Information Sheet for Borrowers says payments are deferred for six months.  

5. Loan Maturity 

The CARES Act provides for a maximum maturity term of ten years from the date the borrower applies for forgiveness for amounts not forgiven.  CARES Act Section 1102(a)(K)(ii).  Treasury informs borrowers that their loan payoff is due in two years.  This could result in cripplingly high monthly payments.  

 6. Verifying Employees 

The CARES Act permits businesses without any employees to obtain PPP loans:  sole proprietors, self-employed individuals, and independent contractors are eligible.  CARES Act Section 1102(a)(D)(ii).  Here’s that section below.  It specifically references businesses that pay independent contractors and file Form 1099-MISC. 

Instead, Treasury misinforms lenders in its Information Sheet for Lenders that lenders need to “verify that a borrower had employees for whom the borrower paid salaries and payroll taxes.”  For cryin’ out loud, Treasury, did anyone over there read the law? 

7. Forgiveness – Amount Used for Payroll Costs 

The CARES Act allows a portion of the PPP loan to be forgiven.  The amount to be forgiven is equal to the amount used for payroll costs and (for mortgages, rent obligations, and utility commitments made prior to February 15, 2020) mortgage interest, rent, and certain utilities spent in the first eight weeks after the loan is disbursed to the borrower.  The CARES Act has no requirement that 75% of the PPP loan funds must be spent on payroll costs.  CARES Act Section 1106

Yet, Treasury’s Overview of the PPP informs the public that “at least 75% of the forgiven amount must have been used for payroll.”  Nothing in the CARES Act requires this and, when combined with Treasury’s incorrectly narrow definition of “payroll costs” this will materially limit the amount of a PPP loan eligible for forgiveness. 

Regulations Must Be Consistent with the CARES Act 

The CARES Act vests Treasury with the authority to make rules and issue guidance for the PPP.  However, the Act requires that, to the “maximum extent practicable” rules and guidance must be “consistent with the terms and conditions required . . . by Section 1102.”  CARES Act Section 1109(d)(2) and (d)(2)(B).    

While I recognize that Treasury has some leeway to create rules and guidance necessary to implement the CARES Act PPP loans, they have to ensure that all rules and guidance are consistent with the law.  They haven’t done that and, as a result, small businesses will not get the assistance Congress intended them to have. 

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