Forgivable Small Business Loans Available Pursuant to the Keeping American Workers Paid and Employed Act (under the CARES Act)

By Bello Welsh LLP

In response to the COVID-19 emergency, the federal government has passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which, among numerous other provisions, makes available forgivable loans for small businesses impacted by COVID-19.[1] Such loans may be used toward payroll costs, as well as covered mortgage, rent, and utility payments, and the program includes incentives for employers to retain or rehire employees.  The following is a summary of these provisions, found in the Keeping American Workers Paid and Employed Act (“KAWPEA,” Title I of the CARES Act).


The “Paycheck Protection Program” (PPP) makes available forgivable (partially or in whole), low-interest loans to small businesses, defined as an entity that employs no more than 500 employees during the covered period,[2] including individuals employed on a full-time, part-time, or other basis. The maximum loan amount available is 2.5 times the employer’s average total monthly “payroll costs” (as defined) during the one-year period before the date on which the loan is made,[3] up to a maximum of $10 million.[4]

“Payroll costs” include payments of compensation to employees, including salary, wages, commissions, or similar amounts; cash tips or the equivalent; vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provision of group health insurance benefits or retirement benefits; and payment of state or local tax assessed on the compensation of employees.  Payments of compensation to a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation are also considered “payroll costs” for purposes of determining the loan amount.[5]  Compensation paid to any individual worker that exceeds $100,000 per year (prorated for the covered period) is excluded from payroll costs, as are certain federal employment taxes, the compensation of an employee whose principal residence is outside of the United States, and qualified sick leave or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.


Proceeds of a loan covered by the PPP may be used for the following:

  • Payroll costs;
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • Employee salaries, commissions, or similar compensations;
  • Payments of interest on any mortgage obligation (but not prepayment of or payment of principle on a mortgage obligation);
  • Rent;
  • Utilities; and
  • Interest on any other debt obligations that were incurred before the covered period.

While not referenced in the Act, the Small Business Administration’s recently-issued guidance states that at least 75% of the forgiven amount must have been used for payroll.


Paycheck Protection Loans are fully guaranteed by the federal government, and no personal guarantee and no collateral will be required. While the Act provides that such loans will bear interest at a rate of no more than 4%, the recently-issued guidance states that the interest rate will be .5%. There is no prepayment penalty for any payment made on a covered loan. The loans will be available through Small Business Act (SBA) approved lenders, and the authority to make such loans will be extended to additional lenders as well. Lenders can be found by visiting the SBA’s webpage. During the covered period, lenders will be required to provide complete payment deferment relief for a period of not less than 6 months (including payment of principal, interest, and fees), and not more than 1 year.

While the deadline to apply is June 30, 2020, it is highly likely that the demand will be significant, so employers are advised to apply as soon as possible after determining that a need for the funds exists. The Small Business Administration has announced that small businesses and sole proprietorships may apply beginning April 3, 2020, while independent contractors and self-employed individuals may apply beginning April 10, 2020. A copy of the application is available here.

The applicant for a Payroll Protection Loan must make the following certifications, in good faith:

  • That the uncertainty of current economic conditions makes necessary the loan request to support the recipient’s ongoing operations;
  • That the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  • That the eligible recipient does not have an application pending for a loan for the same purpose and duplicative of amounts applied for or received under a covered loan; and
  • That during the period February 15, 2020-December 31, 2020, the recipient has not received (and will not receive) amounts under the law for the same purpose and duplicative of amounts applied for or received under a covered loan.

Loan forgiveness

 Paycheck Protection Loans are eligible for forgiveness (partial or in whole), in an amount equal to the sum of costs incurred and payments made during the 8-week period beginning on the date of the origination of the loan, including:

  • Payroll costs (excluding compensation paid to any individual worker that exceeds $100,000 per year, prorated for the covered period);
  • Any payment of interest on any covered mortgage obligation (including any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020);
  • Any payment on any covered rent obligation under a leasing agreement in force before February 15, 2020; and
  • Any covered utility payment for distribution of electricity, gas, water, transportation, telephone, or internet access, for which service began before February 15, 2020.

The borrower must submit an application to the lender to seek loan forgiveness, including documentation verifying the number of full-time equivalent employees on payroll and pay rates, canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, covered lease obligations, and covered utility payments, and a certification from an authorized representative of the borrower that such documentation is true and correct and that the amount for which forgiveness is requested was used to retain employees, make interest payments on covered mortgage, rent, or utility obligations, and any other documentation deemed necessary.

The lender will issue a decision on the borrower’s application for loan forgiveness no later than 60 days after receiving the application. Forgiven amounts will be excluded from the borrower’s gross income.

Loans with a remaining balance after the application of loan forgiveness amount will continue to be guaranteed by the federal government. While the Act provides that such loans will have a maximum maturity of 10 years from the date on which the borrower applies for loan forgiveness, the recently-issued guidance states that the loan has a maturity of 2 years. The amount of loan forgiveness cannot exceed the principal amount of the financing made available under the covered loan.


 The KAWPEA creates incentives for employers to maintain and restore employment and pay levels by providing that the amount of loan forgiveness may be reduced according to a proportional formula, if the employer (1) reduces the average number of full-time employees (FTEs) and/or (2) reduces the total salary or wages of employees who earned $100,000 or less in 2019 by more than 25%.

  • In the case of a reduction of average FTEs, the loan forgiveness will be reduced by the ratio of the average FTEs during the covered period to the average FTEs during a benchmark period. That is, the average monthly FTEs[6] during the covered 8-week period is divided by the average monthly FTEs during the employer’s chosen benchmark period (either 2/15/19 to 6/30/19, or 1/1/20 to 2/29/20, at the employer’s election).  The total amount of the loan eligible for forgiveness is then multiplied by the resulting fraction, which is the ultimate amount of the forgiveness.
  • In the case of a reduction of salary or wages of employees who earned $100,000 or less in 2019 (“relevant employees”), the reduction in the loan forgiveness is equal to the reduction in the wages of these employees that exceeds 25%. That is, the total amount of reductions in the total salary/wages of all relevant employees during the covered 8-week period that are in excess of 25% of the total salary/wages of these employees during the immediately preceding full quarter is subtracted from the amount of loan forgiveness. [7]

However, the amount of loan forgiveness will not be reduced by any reductions that occurred in the period February 15, 2020 through 30 days after the enactment of the CARES Act (April 26, 2020) if, by June 30, 2020, the employer has eliminated those reductions. Further, borrowers with tipped employees may receive forgiveness for additional wages paid to those employees.  As the above reflects, the calculation to determine how the loan forgiveness will be applied to a given employer is complicated and fact-specific, and at this point is made more complicated by ambiguities in the law.  Therefore, we have not provided hypothetical examples here, but we expect there to be further guidance (from the SBA and possibly other agencies) on how to make these calculations.  In the meantime, we can work with clients to provide preliminary advice on how a specific situation may be analyzed.

The Small Business Administration has a webpage dedicated to assisting small businesses navigate available loans, including the PPP.  A link this page may be found here.  The SBA also provides other forms of assistance, including disaster loans and COVID-19 related forgivable advances on such loans.  For more information, visit the SBA site at

It is our understanding that some banks have already reached out to businesses that may be eligible for PPP loans.  If your bank has not, we suggest that you contact your relationship manager.

We will continue to monitor legal developments related to COVID-19 and provide updates as new laws and regulations applicable to employers are enacted.

[1] Provisions of the CARES Act that significantly expand eligibility for unemployment benefits and increase available unemployment compensation are discussed in Bello Welsh’s prior client alert, available here. Our analysis of additional provisions of the CARES Act, including those relating to business taxes and additional funding sources, is available here.

[2] Importantly for employers in the restaurant and hospitality industries, the PPP also provides that such entities with more than 500 employees are eligible for such loans as long as no more than 500 employees are employed in one physical location.

[3] An alternate calculation is available for seasonal and recently established employers.

[4] The covered period runs from February 15, 2020 through June 30, 2020. During this period, individuals who operate under a sole proprietorship or as an independent contractor, and eligible self-employed individuals, are also eligible to receive a covered loan, a departure from the SBA’s usual loan eligibility requirements.

[5] The statute is ambiguous as to whether a business that uses both employees and independent contractors could include such payments to its independent contractors in determining the loan amount, or whether such payments are only available to an independent contractor seeking a loan on their own behalf.

[6] The average monthly number of FTEs is determined by calculating the average number of FTEs for each pay period falling within a month.

[7]  Note that the statute is ambiguous regarding which calculation should be performed first in the case of a reduction in both FTEs and salary/wages.  Given that the order of the calculation will impact the result, it is expected that agency guidance will resolve this issue.