Moving Forward… What the 2020 CARES Act Means for Your Business: Forgivable Small Business Loans

On March 27, 2020, a $2.2 trillion COVID-19 stimulus package titled the CARES Act (the “Act”) became law.  While the Act provides the much-ballyhooed cash payments for individuals, it also contains several provisions to help prevent business closures and lay-offs as the nation grapples with the coronavirus pandemic. Below we discuss how one of these provisions, forgivable small business loans, may be what your business needs to weather the storm.

WHAT ARE THE CARES ACT FORGIVABLE SMALL BUSINESS LOANS?

The Act amends the Small Business Act, appropriating $349 billion to fund loans to small businesses (the “SBA Loans”) to help them maintain payroll through the COVID-19 emergency period, from the date of the loan through December 31, 2020 (the “Loan Period”). The Small Business Administration (the “SBA”) and the Treasury Department have thirty days to issue regulations and guidance about the SBA Loan program under the CARES Act.

Subject to certain conditions, the SBA Loans are forgivable if the proceeds are used to pay expenses that allow the business to retain its workforce during the Loan Period—specifically, eligible payroll costs, mortgage interest payments, rent payments or utility costs (the “Eligible Expenditures”).

The SBA Loans have a maximum interest rate of 4%, are nonrecourse, requiring no personal guarantees from business owners, and require no debt service payments for at least six months. The SBA Loans will be made by lenders that are already approved to make Small Business Act loans, which will stream-line the application and closing process.

The deadline to apply for an SBA Loan is June 30, 2020.

HOW MUCH DOES THE ACT ALLOW A SMALL BUSINESS TO BORROW?

The maximum SBA Loan amount is the greater of: (i) 2.5 times average total monthly payroll costs incurred during the 1-year period before the date the loan is made or (ii) $10 million.  For a business that has an outstanding SBA disaster loan made after January 31, 2020, the maximum amount of a forgivable SBA Loan is reduced by the amount of such disaster loan.

WHO IS ELIGIBLE TO BORROW A FORGIVABLE SMALL BUSINESS LOAN?

Generally, SBA Loans are available for any for-profit or nonprofit business that employs fewer than 500 employees.  Employees include all full-time, part-time and those employed on other bases. Sole-proprietors and self-employed individuals may also be eligible.

Some larger businesses may be eligible if the Small Business Administration (the “SBA”) determines that, according to the standards of a particular industry, a small business in that industry is greater than 500 employees. Additionally, there is a special eligibility rule for businesses in the accommodation and food services sector under the North American Industry Classification System (NCAIS), whereby such businesses may qualify for SBA Loans if they employ fewer than 500 workers per location.

WHAT EXPENSES MAY A SMALL BUSINESS LOAN BE USED FOR AND QUALIFY FOR FORGIVENESS?

Forgiveness of an SBA Loan is limited to the principal of the loan and to the extent the SBA Loan proceeds were used to pay Eligible Expenditures during the Loan Period.  Additionally, the Administration may reduce the amount of SBA Loan principal forgiven if the borrower reduces its number of employees during the COVID-19 emergency period.

Eligible Expenditures include eligible payroll costs, payments of mortgage interest, rent payments and utility payments. Eligible payroll costs include salaries, wages, commissions, tips, vacation time, sick leave, parental or family leave, severance, costs of providing healthcare benefits, retirement benefits, and state and local employment taxes.

The amount of forgiveness of an SBA Loan will be reduced by the amount a borrower uses SBA Loan proceeds for expenditures that are not Eligible Expenditures. Eligible Expenditures do not include Families First Coronavirus Response Act sick leave or family leave payments.  Additionally, payments of more than $8,333 of monthly compensation to any individual employee are not Eligible Expenditures.

To receive forgiveness, borrowers will need to submit certified documentation to the Administration verifying the number of employees and showing expenditures during the Loan Period.

For further advice regarding the forgivability or tax consequences of the SBA Loans please contact an SMDK attorney.

WHAT DOES IT MEAN IF A CARES ACT SMALL BUSINESS LOAN IS FORGIVEN?

SBA Loans may be forgiven up to 100% of the principal of the loan. The portion of the SBA Loan that is forgiven will not need to be repaid.  Ordinarily, when a debt is forgiven the amount forgiven is taxable; however, the amount of forgiven SBA Loan debt is nontaxable to the borrower.

WHAT DO YOU DO IF YOU HAVE QUESTIONS ABOUT FORGIVABLE SMALL BUSINESS LOANS OR THE CARES ACT?

While this advisory is not legal advice, you can call your SMDK attorney for advice regarding your specific situation. We are available to assist you in answering questions about SBA Loans or other provisions of the CARES Act and how they apply to you or your business.