Bulletin #5: Paycheck Protection Program Loan Forgiveness

This is the fifth bulletin provided by Vernon Litigation Group to support local small business owners and help navigate the challenges of staying in business, supporting employees and clients, supporting the community, and positioning the business for growth and success on the other side of the COVID-19 crisis.

This bulletin highlights and summarizes the current Paycheck Protection Program loan forgiveness requirements, as we believe it is important that small businesses clearly understand the requirements for loan forgiveness as well as the restrictions on the borrower’s use of the proceeds.

Loan Forgiveness for the Paycheck Protection Program Loans:

The Paycheck Protection Program, established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), provides forgivable loans to small businesses to help cover up to eight (8) weeks of expenses, including payroll costs, interest on mortgages, rent, and utilities.

Under the CARES Act, small business borrowers may use the Paycheck Protection Program loan proceeds to pay any of the following:

  • Payroll costs include all of the following: salaries, wages, commissions, and tips (capped at $100,000 for each employee); payment for sick, vacation, parental, family, or medical leave; severance payments; payments required for group health care benefits (including insurance premiums); payments for retirement benefits; and state and local taxes on employee compensation;
  • Interest on any debt or mortgage obligations that existed prior to February 15, 2020;
  • Rent arising under a lease agreement prior to February 15, 2020; and
  • Utility payments (including gas, water, electricity, transportation, telephone or internet access) for service that began prior to February 15, 2020.

The governmental guidance requires small business borrowers to spend at least 75% of the loan proceeds on payroll costs (as defined above). The small business is responsible for documenting the use of proceeds in order to determine the amount of forgiveness and may seek loan forgiveness by submitting a request to its lender, along with documentation that verifies its number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. The loan lender will evaluate the small businesses’ use of the proceeds during the eight (8) week period following the loan’s origination to assess its eligibility for forgiveness. The small business borrower is eligible for loan forgiveness if it uses at least 75% of the loan proceeds for payroll costs, with any balance going towards covered mortgage interest payments, lease payments, and/or utilities (as defined above).

Reductions of the Loan Forgiveness Amount:

The amount of loan forgiveness may be reduced in proportion to any reduction in full-time equivalent employees. Small businesses may avoid a reduction of the loan forgiveness amount if the number of full-time equivalent employees is restored by June 30, 2020.

The amount of loan forgiveness may be further reduced if employees who made less than $100,000 in annualized wages in 2019 receive a reduction in pay of more than 25% during the eight (8) week period following the loan’s origination.

Liability for the Unauthorized Use of Paycheck Protection Program Loans:

If the small business uses the loan proceeds for unauthorized purposes, the small business may be required to repay those amounts and could be subject to additional liabilities and/or charges for knowing violations or misappropriations.

For More Information:

Given the foregoing, the small business should do its due diligence and consider its options to make informed business decisions based on what makes the most sense for its unique situation and circumstances. If you have any questions or require further assistance to help you navigate through these difficult times, please feel free to give us a call. We are all in this together.

Vernon Litigation Group represents businesses & individuals throughout the United States who have financial disputes, including cyber litigation, securities litigation & arbitration, business & commercial litigation, financial advisors & employment disputes and FINRA arbitration. For more information contact, bsandovalbanker@vernonlitigation.com or call (239) 319-4434.

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