Late Wednesday night, on March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act.”  This legislation is designed to bring financial relief to individuals and businesses hurting around the country due to the Coronavirus Pandemic.  The CARES Act now makes its way to the House for a vote and is expected to be signed into law by President Trump as-is later this week. 

One major portion of the legislation is that the federal government has allocated $349 billion in loans to assist small businesses, sole-proprietors, and the self-employed.  These loans will be given out by FDIC-insured banks, and Congressional leaders are saying that in some instances loans will be available the same day as the application is submitted.  According to President Trump’s press conference on March 25, 2020, the application process will likely open up in early April 2020.  As described below, under some circumstances, it is possible that a small business taking out a loan could have it 100% forgiven. There is much left to learn, but here’s what we know so far:

How much is the loan?

Once approved, the loan amount can be up to $10 million or 2.5 times the average total monthly payments by the applicant for payroll costs incurred during the one-year period before the date on which the loan is made.

Please note that “payroll costs” means all salaries, wages, commissions, or “similar compensation” paid by the applicant.  It also includes payment for vacation, parental, family, medical, or sick leave, and allowances for dismissals and separation.  It includes payments required for the provisions of group health care benefits, including insurance premiums.  And finally, this includes payments made to any retirement benefit and payments of state or local taxes assessed on the compensation of the employees. 

Payroll costs do not include the compensation of individuals with an annual salary of more than $100,000, any compensation to an employee who lives outside of the United States, or payments made that qualify as sick and family leave under the FFCRA.

What can the loan pay for?

The loan can be used to pay for:

  • Payroll support, including paid sick, medical, or family leave, and costs related to the continuation of group health care benefits during those periods of leave;
  • Employee salaries;
  • Mortgage interest payments;
  • Rent (including rent under a lease agreement);
  • Utilities; and
  • Interest on any other debt obligations that were incurred before February 15, 2020

What is Loan Forgiveness?

An applicant that takes a loan shall be eligible for forgiveness of indebtedness in the amount equal to the sum of the following costs incurred and payments made from the date it received the loan for a subsequent eight-week period.  Meaning, the amount of potential loan forgiveness is limited to the type of payment made (from the list below) and the time that it was made (eight weeks from receipt of the loan).

  • Payroll costs
  • Any payment of interest on a mortgage obligation
  • Any payment of rent; and 
  • Any payment for utilities

Once the applicant submits its forgiveness application with the required materials, the Administrator will have the total sum back to the applicant within 90 days. 

Can the loan forgiveness amount be reduced?

Yes.  The loan forgiveness amount has two potential reductions. 

The first reduction deals with employee retention.  The amount of loan forgiveness will be reduced proportionally to the amount of employees that were retained compared to the previous year.  To get this reduction, the applicant divides the average number of full-time employees per month between February 15, 2020, and June 30, 2020, by the average number of full-time employees per month between February 15, 2019, and June 30, 2019.  This number is then subtracted from 1.  

For example, Company has 20 employees during the covered period when it is receiving the loan.  Last year in 2019, Company had 25 employees.  20/25= .8.  1 – .8 = .2 which is a 20% reduction.  To determine how many employees a company had during the relevant period, the average number of full-time equivalent employees shall be determined by calculating the average number of employees for each pay period falling within a month.

The second reduction deals with employee compensation.  This second reduction is proportionally related to any employee (making less than $100,000) who took a pay cut in excess of 25%.  There is, however, an exception to this reduction if the employee’s pay is reinstated to the pre-reduced amount by June 30, 2020. 

What will the applicant need to apply?

Applicants need to submit an application to the lender that includes documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described in the loan forgiveness section.  They must also certify that the funds will be used to retain workers and maintain payroll or for one of the other above-approved reasons.

Applicants should also begin preparing these documents, so when the application portal opens you can hit the ground running:

  • Payroll tax filings reported to the Internal Revenue Service;
  • State income, payroll, and unemployment insurance filings;
  • Financial statements verifying payment on debt obligations incurred before the covered period; 
  • Documentation verifying covered mortgage obligations, lease obligations, and utility obligations; and
  • Any other documentation the Administrator determines necessary.