COVID-19 UPDATES: CARES Act Forgivable Loans

Illustration of hand completing loan application on clipboard

Friday brought us significant federal legislation in response to the COVID-19 crisis in the form of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). In today’s update, we focus on the (likely significant) relief the Act may afford to our small business clients by opening up, and possibly forgiving repayments of, loans under Section 7(a) of the Small Business Act.

In an effort to incentivize businesses to keep employees on their payrolls during the pandemic, despite an unprecedented number of health-related business closures, the CARES Act provides that an employer which maintains its employees on payroll into the summer can (1) receive funding from an SBA loan, and (2) be forgiven of the obligation to repay that loan in an amount equivalent to expenditures on approved items. To receive such a loan, the business cannot have received an economic injury disaster loan and must otherwise be eligible for an SBA loan, although certain restrictions are lifted, such as for certain businesses with more than 500 employees, and the requirements for collateral and guarantees are waived, thereby expanding potential eligible borrowers.

The CARES Act “Loan Paycheck Protection Program” allows businesses with fewer than 500 employees, among others, to obtain a loan up to two-and-a-half times their monthly payroll and itemized related employee-benefit costs (averaged over 12 months and up to $10 million total), but specifically excludes federally-mandated sick leave and emergency family leave (as they get tax credits) and the prorated portion of employee compensation exceeding $100,000 annually. Also, the forgiven amount will be reduced proportionally by any reduction in the business’s number of employees, with a re-hire exception.

The loan forgiveness is equal to the amount spent by the borrower during an 8-week period from the loan on payroll costs, interest payments (not principal payments) and on any mortgage and rent on any lease in place prior to February 15, 2020, as well as on payment on any utility for which service began before February 15, 2020 (e.g., electric, gas, water, transportation, phone and internet). Notably, the forgiveness is measured by cost expenditures, and not related to proving losses suffered during the national disaster, because the legislation presumes a negative effect from the COVID-19 pandemic.

Jacklyn Fetbroyt is a founding member of Kang Haggerty LLC and is currently a committeeperson of the Voorhees Township Committee. Among other things, Jackie focuses on counseling companies and business owners through all stages of their ventures from conception to dissolution, assisting her business clients in all of their needs for maintenance and growth. On Township Committee, Jackie strives to be a resource to and ears of the residents in her hometown. 

In this ever-changing landscape of information and legislation, please be aware that the information contained in this blog post may no longer be relevant or applicable. The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion

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