CARES Act and SBA 7(a) Small Interruption Loans

 In Business

On Friday, March 27th, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) into law. This new law will enhance the SBA – Small Business Administration’s 7(a) loan program to provide much-needed aid to small businesses and nonprofit organizations during this challenging time to cover operational costs including payroll and rent.

These loans are 100% guaranteed by the federal government and rather than businesses or individuals. If these funds are used for eligible expenses and specified criteria are met, the loan can be forgiven, which means it would not have to be repaid.

Loan amount & covered period:

Applicants are eligible for a loan equal to 2.5 times their average monthly payroll costs for the last 12 months. The maximum amount of a 7(a) loan is $10 million.

The loan interest rate is fixed at 4%. There are no loan fees, and the loan can be forgiven if the criteria below are met.

Use of Funds:

  • Payroll costs including payroll tax, sick leave, health insurance premiums and retirement benefits
  • Utilities
  • Rent
  • Mortgage interest originating prior to February 15, 2020
  • Other debt interest originating prior to February 15, 2020

Who is eligible?

Any of the following that were in operation prior to February 15, 2020:

  • Businesses with less than 500 employees
  • Self-employed individuals
  • Nonprofits with less than 500 employees

Application Process:

The SBA – Small Business Association is currently working to finalize the loan application process. However, they will most likely require a copy of your prior-year tax returns and payroll information. SBA loan applicants will be required to sign a good faith certification that they have been affected by COVID-19 and that funds will be used to retain employees and existing debt obligations. We will update this information as details are released.

Loan Forgiveness:

After the first 8 weeks of the loan, borrowers can apply to have up to 100% of their loan forgiven. The amount forgiven will be the amount spent on the expenses listed above in “Use of Funds.” These qualified expenses must be incurred within the first 8 weeks of the life of the loan. Business owners must provide specific documentation to the lender related to the appropriate use of the funds in order to prove that the business or nonprofit met all the criteria during this 8-week period.

These funds are intended to help businesses to maintain the same level of employees that they had in the recent past. The borrower must provide documentation to prove they maintained the same number of full-time employees (FTEs) and similar pay rates. If the borrower does not maintain the same level of FTEs the amount of their loan that is eligible for forgiveness is significantly decreased.

Debt forgiveness has traditionally been taxed as income, but under this program the loan forgiveness is tax-free.

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