March 30, 2020

COVID-19 Updates – Fast Facts – Loan Forgiveness under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)

By: M. Ari Storch and Shannon A. Byrne

On March 27, 2020, President Donald Trump signed legislation commonly known as the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) intended to stimulate the economy in response to the economic effects resulting from COVID-19. Included in this legislation are competitive loan offerings, with certain loan forgiveness provisions, to help small businesses meet their working capital, payroll and other operating expense needs.

Below are some fast facts businesses need to know about loan forgiveness under the CARES Act.

Forgiveness on Certain Loan Payments for the First Eight Weeks after Loan Closing (collectively, “Forgivable Costs”):

  • Payroll costs
  • Interest payments on mortgages assumed in the ordinary course of business prior to February 15, 2020 (“Covered Mortgage Obligations”)
  • Payments of rent on leases in force prior to February 15, 2020 (“Covered Lease Obligations”)
  • Payments of most utilities for which service began prior to February 15, 2020 (“Covered Utility Payments”)

Limits on Amount of Loan that can be Forgiven:

  • Amount forgiven cannot exceed the principal amount of loan
  • Amount forgiven does not include accrued interest on the principal amount of the loan
  • Not more than 25% of the forgiveness amount may be for non-payroll costs

Reduction of Amount Forgiven Based on Reduction of Full-Time Employees:

  • Amount able to be forgiven is reduced by multiplying the Forgivable Costs by the quotient obtained by dividing:
    • (A) the average number of employees during the 8-week period following the closing of a loan under the CARES Act (the “Covered Period”), by
    • (B)(i) either (at the applicant’s selection) the average number of full-time employees per month for Calendar Year 2019, or (ii) the average number of full-time employees per month from January 1, 2020, to February 29, 2020

Reduction of Amount Forgiven Based on Reduction of Salaries:

  • Amount able to be forgiven is reduced by the amount of any reduction in total salary of any employee during the Covered Period in excess of 25% from the most recent full quarter before the Covered Period
    • Since application of loan proceeds to cover employee’s salaries exceeding $100,000 is not permissible, a reduction of such employee’s salary does not reduce the amount forgiven
  • Under certain circumstances, employers may rehire employees or increase previously reduced salaries prior to June 30, 2020 to avoid the above reductions

How to Apply for Loan Forgiveness:

  • Submit an application to the lender that is servicing the loan with the proper documentation
  • Loans will not be forgiven unless the borrower applies for loan forgiveness and provides the required documentation

Documentation Required with Application for Loan Forgiveness:

  • Documentation verifying the number of full-time employees on payroll and pay rates for the following periods:
    • for the Calendar Year 2019 (as applicable based on selection of applicant above);
    • from January 1, 2020 to February 29, 2020 (as applicable based on selection of applicant above); and
    • the Covered Period.
  • Documentation verifying such full-time employees includes:
    • Payroll tax filings reports to the IRS; and
    • State income, payroll and unemployment insurance filings.
  • Documentation of canceled checks, payment receipts, transcripts of accounts or other documents verifying payments of Forgivable Costs.
  • Certificate from the authorized representative of the borrower that:
    • The documentation presented is true and correct; and
    • The amount for which forgiveness is requested was used to retain employees, make interest payments on Covered Mortgage Obligations, make payments on Covered Lease Obligations or make Covered Utility Payments.
  • Any other documentation deemed necessary by the Small Business Association (the “SBA”)

For more information on the eligibility requirements, required application materials, and loan terms under the CARES Act click here.

More information will become available in the upcoming days and weeks.  Rosenberg Martin Greenberg will continue to post material relevant to businesses as they manage through this evolving situation.  Until then, stay safe and, if you have any questions or need assistance during the loan application process, please feel free to give us a call.