Recipients of SBA 7(a) Loans “Paycheck Protection Program” Under the CARES Act are Eligible to Have Certain Amounts Forgiven

Current as of March 28, 2020


Key Points:

  • There are stipulations to small business loan forgiveness under the CARES Act, such as employee count and compensation.
  • If a company receives loan forgiveness under this section, they cannot also receive employer payroll tax payment delays under section 2202 of the CARES Act.
  • Canceled indebtedness under this section shall be excluded from gross income purposes, which means it is not taxable.

Recipients of SBA 7(a) loans, also known as the paycheck protection program, during the period 2/15/20 through 6/30/20 are eligible to have certain amounts forgiven after submitting an application to the lender, which includes documentation verifying full-time equivalent employees on payroll and pay rates for the covered period.  The covered period is the 8-week period after the loan is received.  Small business loan forgiveness under the CARES Act, is one differentiating factor from the Economic Injury Disaster Loans (EIDL), which are also offered through the Small Business Administration.  There is some wording floating around out there, which would make one think you can apply for both the paycheck protection program loan as well as the EIDL loan, but we are advising our clients to be careful doing this.  There is still not enough clarification for a business owner to understand how this may impact them long-term.

The application must include:

  • Payroll tax filings reported to IRS
  • State income, payroll, and unemployment insurance filings
  • Documentation including cancelled checks, payment receipts, or other docs verifying payments on a covered mortgage obligation, payments on covered lease obligations, and covered utility payment
  • Certification from authorized individual of recipient
  • Other documentation the SBA deems necessary

Loan forgiveness amount is equal to the following costs incurred during the ‘covered period’:

  • payroll costs
  • payment of interest on any mortgage obligation in effect as of 2/15/20
  • payment on rent obligations that were in place as of 2/15/20
  • payment for utilities that were in place as of 2/15/20

Maximum forgiveness amount is the principal amount of the loan, REDUCED BY:

Reduction in # of employees: The forgiveness amount will be reduced by the following computation:

    1. Employee count forgiveness reduction = 1 – (average full time employees per month during covered period/ average full time employees per month during 2/15/19 – 6/30/19 OR average full time employee per month during 1/1/20 – 2/29/20). The borrower can elect which prior period to use for the computation.
      • The average full time employee count will be computed based on payroll periods falling within the months
    2. Reduction in compensation: The forgiveness amount will also be reduced by the amount of compensation for each employee (who did not receive during any single pay period during 2019, wages or salary at an annualized rate of pay in excess of $100k), which has been reduced in excess of 25% during the covered period as compared to the most recent full quarter that the the employee was paid.

Other Key Factors:

  • Companies with tipped employees may receive forgiveness for additional wages paid to those employees.
  • Re-HIRE EXEMPTION-The reductions of forgiveness amounts in 1) and 2) above can be exempt if there was a reduction in full time employees or salary levels in excess of 25% from 2/15/20 – 30 days after bill is passed that was eliminated by 6/30/20.
  • If a company receives loan forgiveness under this section, they cannot also receive employer payroll tax payment delays under section 2202 of the Act.
  • The applications for loan forgiveness shall have a decision from lender within 60 days of receipt of application.
  • Canceled indebtedness under this section shall be excluded from gross income purposes.

For any question please reach out to me at cdennis@teamdkb.com, or a member of our team at hello@teamdkb.com.