COVID-19 Relief: Small Business Loan Forgiveness under the CARES Act

By way of brief introduction, an eligible business may borrow a Paycheck Protection Loan in an amount of up to $10 million. The actual amount is 2.5 x average total monthly “payroll costs” (defined below) during the past year, with flexibility for seasonal employers and with an ability to refinance a recent Economic Injury Disaster Loan.

Employers with no more than 500 employees are eligible, as are larger employers in certain industries. Paycheck Protection Loans are eligible for forgiveness, as described below.

Paycheck Protection Loan Forgiveness

Paycheck Protection Loans will be forgiven to the extent actually used for permitted purposes in the eight-week period beginning on the date of the origination of the loan. Permitted purposes include (1) payroll costs, (2) rent, (3) utilities and (4) mortgage interest payments. In order to be eligible for forgiveness, the latter amounts must arise under a lease or mortgage loan incurred, or utility service that began, before February 15, 2020.  The SBA anticipates that due to high subscription, no more than 25 percent of the total forgiven amount may be non-payroll costs.

However, there is an important limit on loan forgiveness. The amount that would otherwise be forgiven is reduced for certain recent cuts in number of employees or their salaries or wages unless the reductions are corrected within the periods described below.

For cuts in number of employees, the amount of loan forgiveness is reduced by the product of (i) the amount of loan forgiveness otherwise available and (ii) the quotient obtained by dividing (a) the average number of full-time equivalent employees per month employed during the eight-week loan forgiveness period by (b) the average number of full-time equivalent employees per month for either (i) the period from February 15, 2019 to June 30, 2019 or, at the election of the borrower, (ii) the period from January 1, 2020 to February 29, 2020. A seasonal employer may use, at its election, either (i) a 12-week period beginning February 15, 2019 or (ii) the period from March 1, 2019 to June 30, 2019.

For example, a business that averaged 50 employees during the eight-week period and 100 during the earlier measuring period would be entitled to only half of its loan forgiveness.

For cuts in employee salaries, the amount of loan forgiveness is reduced by: (i) the amount of decrease in total salary or wages of any employee during the eight-week loan forgiveness period, to the extent in excess of (ii) 25 percent of the total salary or wages of the employee during the most recent quarter before the 8-week period. Only employees who were employed during any single pay period in 2019 and did not receive salary at an annualized rate in excess of $100,000 during any single pay period in 2019 are included in this calculation.

The above reductions in loan forgiveness can be mitigated. The amount of loan forgiveness is determined without regard to headcount or salary reductions during the period from February 15, 2020 to April 26, 2020 if: (i) (I) during the period beginning on February15, 2020 and ending on April 26, 2020, there is a reduction, as compared to February 15, 2020, in the number of full-time equivalent employees of an eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the number of full-time equivalent employees; or (ii) (I) during the period beginning on February 15, 2020 and ending on April 26, 2020, there is a reduction, as compared to February 15, 2020, in the salary or wages of one or more employees of the eligible recipient; and (II) not later than June 30, 2020, the eligible employer has eliminated the reduction in the salary or wages of such employees; or (iii) in which the events described in clause (i) and (ii) occur.

Applications for Paycheck Protection loan forgiveness should be made directly with the lender providing such loan. Borrowers applying for forgiveness should have available documentation verifying (1) the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings; and (2) payments for mortgage interest, lease, and utilities payment. The amounts that are forgiven will not be taxed.

“Payroll costs” include costs related to payments of (1) salary, wage, commission, or similar compensation; (2) cash tips or equivalent; (3) vacation, parental, family, medical or sick leave; (4) employee severance; (5) group healthcare benefits, including insurance premiums; (6) retirement benefits; and (7) state and local employment taxes.

Only “payroll costs” of employees residing in the U.S. are counted, and payroll costs exclude amounts over $100,000 per annum for any employee, prorated for the covered period.

Additional Resources

Pillsbury attorneys can help clients interpret the foregoing requirements and determine whether to apply for an SBA loan. Section 1114 of the Act directs the SBA to pass regulations to implement the Act by April 11, 2020. We will continue to monitor the forthcoming regulations. In the meantime, please refer to our client alerts COVID-19 Relief: Understanding SBA Loan Opportunities Under the CARES Act and COVID-19 Relief: Eligibility for the CARES Act’s Small Business Loans for additional information.

Pillsbury’s experienced crisis management professionals are closely monitoring the global threat of COVID-19, drawing on the firm’s capabilities in supply chain management, insurance law, cybersecurity, employment law, corporate law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.