On March 27, 2020, President Trump signed into law H.R. 748 the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act.” Section 1106 creates an SBA loan forgiveness program that any employer should seriously consider as the program is intended to avoid massive layoffs by effectively paying most of your paying payroll, rent and utilities for eight weeks , provided you do not fire your work force during the eight week period. I know, it sounds too good to be true, but it is. Here are some of the details.
1. The Basics. In order to participate in the program, you will need to apply for a typical Section 7(a) Small Business Loan (i.e., a loan guaranteed by the SBA under 15 U.S.C. 636(a)) during the period beginning February 15, 2020 and ending on June 30, 2020. Provided you meet the requirements discussed below, the bank will forgive the loan and you will not have to repay it. The amount forgiven is not considered cancellation of indebtedness income for federal income tax purposes, thus you will not need to include the cancelled debt in taxable income. The Act also reduces SBA fees and directs banks to process loans within 15 days. In order to receive the loan, the borrower must certify that: (a) due to the current economic uncertainties the borrower needs the loan to support the borrower’s ongoing operations; (b) the borrower will use the loan proceeds to (i) retain workers and maintain payroll and (ii) make mortgage, lease and utility payments; (c) the borrower has not and will not apply for another Section 7(a) for the same purpose and duplicative of same amounts to be paid from the proceeds from the loan for which the borrower is applying.
2. Eligibility. The Act expands eligibly borrowers for Section 7(a) SBA loans to include nonprofits, sole proprietors, independent contractors, and eligible self-employed individuals and employers with less than 500 employees. The Act also increases the loan amount maximum to the lesser of: (i) two and one-half times the borrower’s average total monthly payroll costs for the 1-year period ending on the loan date before the date on which the loan is or (ii) $10,000,000. The Act also expands the purpose for which SBA loans may be used during the “covered period” (defined as the 8-week period beginning on the date of the origination of the loan) to include payroll, rent, mortgage interest and utility payments, and increases the loan guaranty amount to 100%. Thus, entities that are not typically eligible for a SBA loan may qualify during the covered period and may use the loan proceeds for purposes beyond those typically available for SBA loans. Note that the Act defines “payroll costs” broadly to include payments for: (a) salary, wages, commissions, or similar compensation; (b) cash tip or equivalents; (c) vacation, parental, family, medical, or sick leave; (d) employment separations; (e) group health care and health insurance premiums; (f) retirement benefits; (g) state and local income tax withholdings but specifically excluding (i) annual compensation in excess of $100,000, prorated for the covered period; (ii) federal employment taxes, including income tax withholdings; and (iii) qualified sick leave wages and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (Public Law 116-127).
3. Limits on Loan Forgiveness. There are some limits on the amount of the loan forgiveness. First and foremost, the amount of forgiveness is limited to the amount incurred and paid during the covered period for: (a) payroll costs, (b) mortgage interest payments; and (c) rent and utility payments. In addition, if the average number of full time equivalent employees during the covered period is less than the number of full time equivalent employees for either the period beginning February 15, 2019 and ending on June 30, 2019 or the period beginning January 1, 2020 and ending on February 29, 2020, whichever is smaller (the “testing period”), then that portion of the loan equal to the percentage decline in full time periods in the covered period is not forgiven. The forgiveness amount is also reduced by the amount by which the employer reduces wages paid to individual employees who make less than $100,000 per year by the amount by which wages paid during the covered decline by more than 25% from the amount the employer paid the employee during the most recent full quarter during which the employee was employed before the covered period. Forgiveness cannot exceed the principal amount of the loan. Repayment of all unforgiven amounts are deferred for up to a year and bear interest at a maximum rate of 4%.
4. Mechanics. Unlike most SBA loans, the government intends to push this program through all lenders. The loan application should be typical of any loan application process (other than the reduced fees and expedited application processing mentioned above). As to the loan forgiveness, the borrower must affirmatively file an application with the lender that originated the loan. The application shall include documentation verifying the number of full-time equivalent employees on payroll and pay rates paid for the covered period, the periods described in paragraph 2 above, including: (1) payroll tax filings made with Internal Revenue Service; (2) state income, payroll, and unemployment insurance filings; and (3) documentation of covered rent, mortgage and utility payments, including cancelled checks, payment receipts, transcripts of accounts. The borrower must also certify that the documentation is true and correct and that the borrower used the amount for which forgiveness is requested to retain employees and to pay covered mortgage interest, rent and utility payments.
5. Concluding Thoughts. This program is extremely attractive. Congress has provided $350 billion in funding. Given the potential benefit, I suspect that only those who apply soon will qualify. Thus, if you have ANY interest in pursuing this program, I strongly urge you to act swiftly. If you would like to discuss further, please give me a call.