Under the CARES Act, Qualifying Businesses Can Obtain Forgivable Loans to Cover Eligible Expenses

By: Scott Emery , Eric Friske | March 31, 2020

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The CARES Act includes a range of provisions intended to provide financial relief to individuals, families, and businesses in response to the economic fall-out of the coronavirus pandemic. A key component of the Act, designed to incentivize small businesses to keep workers on their payroll, is the Paycheck Protection Program (PPP). This loan program will make forgivable loans of up to $10,000,000 available to qualifying businesses with no personal guarantee of borrower’s owners or collateral requirements. All or a portion of the loan may be forgivable and, if not, debt payments may be deferred for up to one year.

PPP loans, administered by the Small Business Administration (SBA), will be available as soon as this Friday, April 3, 2020, through June 30, 2020. Applicable uses for the PPP loan proceeds include payments for qualified payroll costs, healthcare costs, mortgage interest, rent and utilities, and interest on pre-existing debt obligations. If the loans are used for these qualifying purposes, and other appropriate conditions are met, all or a portion of the principal balance can be forgiven and the forgiven amount is tax-free.  

Who is eligible for Paycheck Protection Program loans?
The following types of businesses will be eligible for a PPP loan under the CARES Act:

  • businesses, nonprofits, and veterans’ organizations that employ not more than the greater of 500 employees or if applicable, the size standard in number of employees established by the SBA for the industry in which the business concern operates;
  • eligible self-employed individuals; 
  • sole proprietors; 
  • independent contractors; and 
  • businesses in the accommodation and food services sector with fewer than 500 employees per location and that fall within North American Industry Classification System code beginning with 72.

For eligibility purposes, a business must also have been operational on February 15, 2020, and had paid employee salaries and payroll taxes or paid independent contractors. 
If a business has already received an economic injury disaster loan for the same purpose, it will not be eligible for a CARES Act loan, but the CARES Act does permit borrowers to refinance economic injury disaster loans obtained after January 31, 2020.

How much money can a business borrow under the Paycheck Protection Program?
The maximum loan amount under the PPP is 2.5 times the business’s average monthly payroll costs, up to a cap of $10 million. For the purpose of calculating average monthly payroll costs, most businesses will use the average total monthly payroll costs during the one-year period before the loan is made. Though still eligible, different rules will apply to seasonal businesses and other businesses not in operation between February 15, 2019, and June 30, 2019. For this calculation, only the compensation of an individual employee up to the rate of an annual salary of $100,000, as prorated, is included for the covered period.

What are eligible uses of loan proceeds?
PPP loans can be used to cover the following business expenses:

  • qualified payroll costs (including compensation, paid leave, severance payments, retirement benefits, and state and local employment taxes);
  • health care costs; 
  • mortgage interest payments or interest on debt obligations incurred prior to February 15, 2020 (payment or prepayments of principal are not eligible); and
  • rent and utility payments.

Funds cannot be used for compensation of employees, independent contractors, or sole proprietors in excess of an annual salary of $100,000 (on a prorated basis), for compensation of employees residing outside of the United States, for certain other taxes imposed under the Internal Revenue Code of 1986, as amended, or for paid leave wages covered by the Families First Coronavirus Response Act.

What does loan forgiveness under the CARES Act mean?
Loan forgiveness means the borrower has been released from an obligation to repay all or part of the loan. The amount of principal forgiven is not taxable income to the borrower.
PPP loans are eligible for forgiveness up to the total amount of eligible payroll payments, interest payments on mortgage obligations, rent payments, and utility payments made during the eight-week period following loan origination. 
However, the amount eligible for loan forgiveness is contingent on maintaining current employment levels and salaries. For example, the amount forgivable may be lowered by reductions in full-time employment if total salaries and wages fall by more than 25% during the period between February 15, 2020, through December 31, 2020. This reduction can be lessened by rehiring employees. 
To apply for forgiveness of the loan, businesses will need to provide documentation verifying their full-time equivalent employees over the covered period from January 1, 2020, to June 30, 2020; documents confirming rent, utilities, and mortgage interest payments; certification of the truth of those documents; and other documents the SBA may request.
If a portion of the loan is not forgiven, SBA guidance reflects that the balance will have a maturity of two years from the borrower’s application date for loan forgiveness and an interest rate of 0.5%.

How do businesses apply for Paycheck Protection Program loans?
Businesses interested in obtaining a forgivable loan should contact an SBA 7(a) approved lender or other lenders qualified to process and service SBA guaranteed loans. Further guidance can be found on the SBA website and is outlined on this fact sheet issued by the Treasury Department.

As part of that loan application process, businesses will be required to self-certify the following:

  1. the loan request is necessary to support the ongoing operations of the employer due to the current uncertain economic conditions; 
  2. the funds will be used to retain workers, maintain payroll, or make mortgage, lease, and utility payments; and
  3. the applicant is not applying for or receiving another PPP loan, Section 7(a) loan, or Economic Injury Disaster Loan under the CARES Act for the same purpose.

Loans under the program are fully guaranteed by the federal government. 

Let us help
At Henson Efron, we are committed to helping our clients navigate these uncertain times. Our knowledgeable team of attorneys is ready to provide you with assistance and advise you of your rights. For more information, please call 612-339-2500 or send us an email.
The purpose of this article is merely to provide general information and should not be construed as legal advice.

Scott Emery
As a naturally curious person, I want to first understand the goals and concerns of my clients and their perspective of a matter. That way, I can deliver relevant information and provide legal counsel in a meaningful way. I bring a problem-solving orientation to advise clients on practical solutions to help them achieve their goals and resolve issues. I represent individuals and businesses across major...
Eric Friske
I represent individuals and businesses in a wide range of complex business, estate, and trust litigation matters.  At each stage along the way, I work closely with my clients to develop a successful strategy for their case, focusing on what is most important to them and their goals. In my litigation practice, I have a proven track record of advocating for my clients in the...