Loan Forgiveness under the CARES Act
Authors:
Rebecca S. Kane, Esq.
Tabitha Croscut, Esq.
Connor J. Crowley, Esq.
Joseph P. Rheaume, Esq.
March 31, 2020
In response to the devastation that the novel coronavirus continues to wreak on the United States economy and on the American worker, on March 27, 2020, President Donald J. Trump signed into law the economic bill titled the “Coronavirus Aid, Relief, and Economic Securities (CARES) Act” (the “Act”). The purpose of the Act is to provide much needed relief to large and small businesses, employees and employers nationwide, in an attempt to minimize the devastating impact that the novel coronavirus has had on the economy. Included in the Act are loans available to small business owners under subsection 1102 of the Act, called the “Paycheck Protection Program (PPP)”, and the details of those loans are discussed in a separate article that can be found
here. For those businesses, sole proprietors, independent contractor, self-employed individuals, nonprofit organizations, veterans organization or Tribal organizations that receive a loan granted pursuant to the PPP (a “covered loan”), subsection 1106 of the Act provides additional assistance to those borrowers pursuant to the provisions for loan forgiveness for these covered loans, which can relieve some immediate and long-term financial burdens. In addition, the amounts forgiven are also excluded from a borrower’s gross income taxable under the Internal Revenue Code and, therefore, the benefit of this program to borrowers can be significant.
There are limitations on the amount of the covered loan that can be forgiven, however, and a borrower should carefully consider those limitations and applicable reductions if forgiveness of the covered loan is necessary to the borrower’s economic viability. While the U.S. Small Business Administration was ordered to issue additional guidance on the loan forgiveness program within thirty (30) days of the Act passing into law, which guidance may clear up some provisions of the Act that are subject to interpretation, we discuss some highlights of subsection 1106 of the Act below to provide potential borrowers with assistance in determining whether any portion of its covered loan would be subject to forgiveness, and what steps such borrower would need to take to maximize the loan forgiveness.
Payments and Costs Subject to Forgiveness
Forgiveness of indebtedness under a covered loan will be granted for the following costs incurred and payments made during the eight (8) week period beginning on the date of the origination of the covered loan and all interest accrued in connection with such amount:
- Payroll Costs (which is a broad term that encompasses salaries, wages, commissions, payments for vacation, parental, family, medical or sick leave, allowances for dismissal or separation, payments required for the provisions of group health care benefits (including insurance premiums), payments of any retirement benefit, and payments of state or local tax assessed on the employee compensation, but payroll costs are subject to some enumerated exceptions and limitations, as described in subsection 1102 of the Act)
- Interest payments on mortgage indebtedness incurred in the ordinary course of business prior to February 15, 2020, but not including any payments or prepayments of principal
- Payment on any rent obligations payable pursuant to a leasing agreement in force before February 15, 2020
- Payments for electricity, gas, water, transportation, telephone or internet for services that began prior to February 15, 2020
Forgiveness Amounts – Limitations and Reductions
Since the overriding goal of this subsection of the Act is to get Americans working again and off the unemployment rolls, the following limitations and reductions on forgiveness of a covered loan are in place to ensure that borrowers that are looking to take advantage of forgiveness of a covered loan are re-hiring any employees that were laid off or furloughed as a result of the novel coronavirus epidemic.
- Forgiveness will be reduced by reductions in the number of employees of a borrower, and the applicable time periods, calculation of number of employees and the percentage reduction to be applied to the forgiveness amount are detailed in the Act
- Forgiveness will be reduced by reductions in employee salary or wages, and the applicable time periods and calculation of the reduction in salary to be subtracted from the forgiveness amount are detailed in the Act
There are some exemptions, however, to the required reductions set forth above. The SBA itself may prescribe regulations granting de minimis exemptions from these required reductions. In addition, Congress understood that until the stimulus bill was passed into law, and for thirty (30) days afterwards when the funds would not be available while the SBA and its approved lenders work through the mechanisms of loaning these funds, borrowers would have likely reduced their workforce due to cash flow constraints, and that a reduction in the workforce and/or salaries during this time period should not be penalized so long as the borrower re-hires its full workforce and reinstitutes its employees’ original salary amounts prior to June 30, 2020.
Documentation Required
We expect that the SBA will provide more detailed guidance on the documentation that will be required to evidence the appropriate forgiveness amount, but the Act provides insight into the required documentation. It will not be surprising if the application for forgiveness appears to require an excessive amount of paperwork, since it is a program backed by the federal government, but we expect that the benefits of forgiveness will be well worth its weight in documents. Based on the Act’s initial guidance, the borrower must submit to the lender an application that includes:
- Documentation verifying the full time or full time equivalent employees on payroll and pay rates for the relevant periods (which will include payroll tax filings to the Internal Revenue Service and state income, payroll and unemployment insurance filings);
- Documentation (e.g., cancelled checks, payment receipts, transcripts of accounts, etc.) verifying payments of mortgage interest, lease obligations and utility payments;
- Certification from the borrower that such documentation is true and correct and that the amount requested for forgiveness was used to retain employees and for other purposes permitted for forgiveness; and
- Other documentation reasonably requested
The decision to grant or deny forgiveness must be made by the lender within sixty (60) days of receipt of the application and documentation, and within ninety (90) days of that date, the SBA will remit to the lender an amount equal to the amount of forgiveness, plus any interest accrued through the date of payment.
For further information or if you have a question about the CARES Act or forgiveness of a loan made under the PPP, please contact a Devine Millimet attorney at 603-669-1000.
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