April 07, 2020

How the CARES Act SBA loan forgiveness works

Thanks in large part to the National Restaurant Association’s advocacy, provisions were built into the coronavirus relief package that make it easier for restaurants to qualify for Small Business Administration loans and get forgiveness on at least some part of the funds borrowed.

But the rules are complex.

Who qualifies?

The Association’s advocacy team was successful in helping define a “small business” for purposes of the Coronavirus Aid, Relief, and Economic Security (CARES) Act as:

  • A business with fewer than 500 employees (including full-time, part-time or any other status)
  • A business that otherwise meets SBA’s size standards
  • For businesses in foodservice and lodging, that number applies on a per-location basis
  • If you’re operating as a franchise or receive financial assistance from an approved Small Business Investment Company, the normal affiliation rules do not apply.

    Generally, affiliation exists when one business controls (or has the power to control) another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties.

Those who also qualify include:

  • Sole proprietors
  • Independent contractors
  • Self-employed individuals

What you may be eligible for

  • Paycheck Protection Program (PPP) — federally-backed loans from traditional lenders to help you offset expenses, particularly payroll costs, but also mortgage interest, rent, and utilities, between February 15 and June 30, 2020.
  • Economic Injury Disaster Loan (EIDL) — accessed through SBA, loans to help you recover from economic setbacks caused by disasters such as COVID-19.
  • EIDL Emergency Grant — an emergency advance of $10,000 when you apply for an EIDL that can be considered a grant with certain provisions.
  • SBA Loan Forgiveness — ability to forego payments on certain portions of SBA loans for a specified length of time.

What can be forgiven?

  • If you already have an SBA loan, you can ask your lender to defer principal and interest payments for up to six months. In these cases, SBA will pay the principal, interest, and any associated fees owed directly to lenders.
  • You don’t have to pay back the EIDL emergency grant advance if you spend it on paid leave, payroll, higher food and supplies costs due to supply chain disruption, your mortgage or lease payments or to cover other payments you can’t make because of a loss in revenue. The cash grant is yours to spend even if you don’t qualify for the EIDL loan, but it will reduce any forgiveness benefits you receive from a PPP loan.
  • SBA will forgive payments of principal and interest on a loan amount equal to what you spend on certain costs for eight weeks from the date of your loan, including:
    • payroll costs
    • interest on a mortgage
    • rent on a lease agreement
    • utility payments
    • additional wages you pay to formerly tipped employees who no longer receive tips

How much can I borrow?

For PPP loans, you can borrow 2.5 times the amount of your average monthly payroll costs from 2019.

  • Payroll costs = the sum of included costs less the sum of excluded costs
    • Included payroll costs for employers are:
      • salaries, wages, commissions, or similar compensation
      • cash tips or equivalent
      • vacation, parental, family, medical, or sick leave
      • severance pay to dismissed or furloughed employees
      • group health care benefits, including insurance premiums
      • retirement benefits
      • state or local taxes assessed on employee compensation
    • Excluded payrolls costs include:
      • individual employee compensation above $100,000 annually, prorated for the period February 15 to June 30, 2020
      • Social Security taxes and income taxes
      • compensation to employees whose principal place of residence is outside of the U.S.
      • qualified sick-leave or family-leave wages for which a credit is allowed under the Families First Coronavirus Response Act
      • Payroll costs for seasonal employers is 2.5 times the amount of payroll costs for 12 weeks beginning either February 15 or March 1.

How much will be forgiven?

  • You’re eligible for loan forgiveness equal to the amount you spend on any of the following items during the 8-week period (beginning on the date the loan originated) as long as the total doesn’t exceed your loan amount:
    • payroll costs
    • interest on a mortgage
    • rent on a lease agreement
    • utility payments
    • additional wages paid to tipped employees
  • You must spend at least 75% of your loan on payroll.
  • Your forgiveness amount may be reduced if you have a lower number of employees or if you reduce your employees’ wages by 25% or more from what they were during the same period a year ago.
  • When the reduction is based on a lower number of employees:

Your forgiveness amount equals your total payroll costs multiplied by the average number of FTE employees you retained for the eight weeks following the date of your loan origination divided by either

1) the average number of FTEs you had per month from Feb. 15 to June 30, 2019; or

2) the average number of FTEs you had per month from Jan. 1 to Feb. 29, 2020; or, if you’re a seasonal employer, the average number of FTEs per month you had on staff from Feb. 15 to June 30, 2019.

To determine how many full-time equivalent (FTE) employees you have, add up the total number of all full- and part-time employee hours worked per week and divide it by 30 hours per week (as proscribed by the Affordable Care Act).

When the reduction is based lowered wages/salaries:

  • Your forgiveness equals your total payroll costs minus the amount of any reduction in wages of more than 25% for all employees earning less than $100,000 per year.

What if I rehire employees?

The plan is intended to encourage you to maintain or quickly rehire employees.

  • If you reduced your number of employees or cut back wages from Feb. 5 through April 26, 2020 (30 days after enactment of CARES Act), the amount of your loan that can be forgiven won’t be reduced if you restore – by June 30, 2020 – the number of employees or wages to the level they were at during the same period last year.

When can I apply?

Starting April 3, 2020, small businesses and sole proprietorships can apply with SBA-approved commercial lenders. Starting April 10, 2020, independent contractors and self-employed individuals can apply. You must apply by June 30, 2020. We encourage you to apply as quickly as you can because there is a funding cap. The application form is on the U.S. Treasury website.


Small Business Administration

U.S. Department of the Treasury, Assistance For Small Business

U.S. Chamber of Commerce Coronavirus Small Business Guide