Forgivable Loan: What You Need to Know

By Travis Miskowitz

President Trump has now signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), providing $2 trillion in stimulus funding. The CARES Act includes several provisions to assist small businesses including a forgivable loan called the Paycheck Protection Loan, which is intended to encourage employers to retain and re-hire employees.

Small businesses (companies with 500 of fewer employees) can apply for the loan directly through banks that make the loans on behalf of the Small Business Administration (SBA), which administers the Paycheck Protection Loans program. Your business may also qualify with a headcount larger than 500 if you meet eligibility requirements for the higher thresholds which you can check at https://www.sba.gov/size-standards/.

Key features of the loan program include:

• Businesses must apply for the loan by June 30
• No personal guarantee which means the SBA has no recourse against any business owner that obtains a loan under the Paycheck Protection Loan program
• The interest rate will not exceed 4%
• Loan payments deferred by six months but not more than one year
• No borrower fees and prepayment fees are waived
• Term not to exceed 10 years

The loan amount cannot exceed $10 million and is determined as the lessor of:

• 2.5x the preceding twelve-month average monthly payroll PLUS the amount outstanding under the SBA’s disaster loan program, or
• For those businesses not in existence during the period February 15, 2019, through June 30, 2019, 2.5x the average monthly payroll for the period January 1 through February 29, 2020, PLUS the amount outstanding under the SBA’s disaster loan program

Payroll costs include:

• Employee compensation that is:

• • Salary, wage, commission, or similar compensation;
  • Payment of cash tip or equivalent;
  • Payment for vacation, parental, family, medical, or sick leave;
  • Allowance for dismissal or separation;
  • Payment required for the provisions of group health care benefits, including insurance premiums;
  • Payment of any retirement benefit; or
  • Payment of state or local tax assessed on the compensation of employees.
• Compensation to a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount not more than $100,000 in one year, as prorated for the covered period.

Payroll does NOT include certain federal taxes, compensation of employees not a resident in the U.S., individual employee compensation over $100,000 annualized, and sick leave and family leave credited under the Families First Coronavirus Response Act.

Borrowers must certify in good faith that:

• Current economic conditions make the loan necessary to support ongoing operations
• Funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments and utility payments
• No other pending applications are duplicative of the covered loan request, and
• The recipient has not received amounts for the same purpose or duplicative amounts from February 15, 2020, through December 31, 2020.

Amounts spent by the borrower during the eight-week period following loan origination for payroll, interest on mortgages, rent and utilities are eligible for loan forgiveness. You must document and substantiate these amounts to the lender in order to receive forgiveness. The forgiven loan amount will not count towards gross income for tax purposes. The amount of loan forgiveness will be reduced if the business reduces headcount or salaries and wages. Borrowers that rehire laid off workers by June 30 won’t be penalized for having a smaller workforce at the beginning of the period.

The remaining loan balance after forgiveness will continue to be guaranteed by SBA and the loan shall have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness.

Lenders have not yet released application guidelines, but are expected to quickly. Now is the time to compile payroll records including Forms W-2, 941 and 1099 to support your loan request and apply once applications are being accepted. You can also check our Business Continuity and Recovery Resource Center for up to date information and guidance.

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