Loan Forgiveness under the Coronavirus Aid, Relief, and Economic Security Act – What it Means for Your Business

In response to the ever-growing economic pressure on businesses caused by the Coronavirus pandemic, the Senate and the House of Representatives enacted the Coronavirus Aid, Relief, and Economic Security Act or the “CARES” Act (the “Act”) on March 19, 2020.

Section 1105 of the Act provides for loan forgiveness of indebtedness on a covered 7(a) loan. So, what does “loan forgiveness” really mean under the Act?

Section 1105(b) of the Act provides that an eligible recipient shall be eligible for forgiveness of indebtedness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuity during the covered period. Under the Act, an “eligible recipient” is the recipient of a covered 7(a) loan. A “covered 7(a) loan” is a loan guaranteed under section 7(a) of the Small Business Act that is made during the covered period (the covered period beginning on March 1, 2020 and ending on June 30, 2020).

Although the Act provides for forgiveness of indebtedness on a covered 7(a) loan in an amount equal to the cost of maintaining payroll continuity during the covered period, the Act imposes limits on what constitutes “the cost of maintaining payroll continuity” and thus, what can be forgiven.

Under Section 1105(d)(1), the amount of loan forgiveness for an eligible recipient shall not exceed the sum of (A) the total payroll costs incurred by the eligible recipient during the covered period; and (B) the amount of payments made during the covered period on debt obligations that were incurred before the covered period. However, the Act specifies that “payroll costs” shall not include (a) the compensation of an individual employee in excess of $33,333 during the covered period; (b) qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or (c) qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act.

In addition to the above limitations, the Act also provides for a reduction based on reduction in number of employees and a reduction relating to compensation. There is, however, an exception for tipped workers.

For purposes of redemption of a guarantee by the lender for a covered 7(a) loan, amounts which are forgiven under Section 1105 will be treated as a default, in accordance with the procedures that are otherwise applicable to a default on a loan guaranteed under section 7(a) of the Small Business Act (15 U.S.C. 636(a)).

Any eligible recipient seeking loan forgiveness under the Act must submit to the lender that originated the covered 7(a) loan an application, the requirements of which are set forth in Section 1105 of the Act.

For more information and further questions, please reach out to a Graydon lawyer at 513-621-6464.