Inside the CARES Act: COVID-19 Loan
Forgiveness Relief—a Section 1106
Julie M. Macomb
Norris McLaughlin P.A.
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Sunday, March 29, 2020
Section 1106 of the Coronavirus Aid, Relief, and Economic Security (CARES)
Act provides loan forgiveness for certain qualifying Small Business Administration
(SBA) loans. A “covered loan” is a loan added under new Section 7(a)(36) of the Small
Business Act, which was added by the CARES Act itself. In addition to being a
“covered loan,” the loan must be for a “covered period,” which is defined as the first
eight weeks following the original of a covered loan.
CARES Act Loan Forgiveness
Specifically, the following items of indebtedness listed below are forgiven if they
are made during the covered period. Additionally, the forgiveness may possibly be
excluded from gross income. However, the amount forgiven cannot exceed the
principal amount of the loan. The items include:
Interest payments on covered mortgages
The amount forgiven will be reduced if the business has had employee layoffs or
reductions to employee salaries and wages.
Forgiveness Reduction Formula for Employee
This formula can only reduce the amount forgiven and cannot increase it. Employers
with seasonal laborers are given a slightly different formula to determine the
average number of employees.
The reduction formula for employee salaries and wages is simpler and the amount
forgiven is reduced by the amount of any reduction in salary or wages of any
employee during the covered period, which is in excess of 25% of total salary and
wages for the most recent quarter for that employee. For purposes of this formula,
employees earning over $100,000 per year are excluded.
If an employer rehires the employees or raises salaries and wages back to their prior
level by June 30, 2020, the reduction formula above does not consider such
Applying for CARES Act Loan Forgiveness
Businesses who want to apply for loan forgiveness under this program need to
submit supporting documentation to their lender, including proof of verification of
employees, proof of utility payments, rent, and other documents to substantiate
their expenses. The lender must provide a decision within 60 days of receiving the
application and supporting documentation. If approved, the SBA Administrator must
remit payment (plus interest) to the lender within 90 days.
Any amount forgiven under the CARES Act that would ordinarily be includible as
gross income to the borrower for federal tax purposes is excluded from gross income.
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Source URL: https://www.natlawreview.com/article/inside-cares-act-covid-19-loanforgiveness-relief-section-1106-primer