S. (in some cases the number of employees can be higher if the company meets SBA small company size standards), pawn shop SC or (2) a maximum tangible net worth of $15 million as of , and an average net income of $5 million or less over the previous two fiscal years. There are also other company size rules that should be considered, especially for Restaurant and Hospitality companies as well as affiliated businesses. ( See Anchin Update dated ). The PPP loan amount is based on 2.5 times the borrowers average monthly payroll costs as defined (see below).

Now that many eligible companies have applied for a PPP loan, and some have started to receive their loan proceeds, it is time to turn our attention to the rules for loan forgiveness. As most companies learned during the two weeks following the passage of the CARES Act, the Act and related rules and guidance issued left many ambiguities as to how to compute the eligible loan amount. Therefore, we should expect that the rules regarding PPP loan forgiveness, which are summarized below based on the Act and the Treasury Departments and SBAs Interim Rule, could likely change as well.

The CARES Act (or the “Act”) instituted the Paycheck Protection Program (PPP), which provides loans between of up to $10 million at 1% interest to employers with (1) 500 or fewer employees residing in the U

The CARES Act provides that PPP loans can be forgiven up to 100% of the amount borrowed if the company meets certain criteria, including:

• Loan proceeds are used to cover “payroll costs”, mortgage interest, rent paid on leases, and utility costs that are paid over the eight-week period that begins the date the loan is made (the “benefit period”);
• Employee headcounts are maintained;
• Compensation levels are maintained for employees earning $100,000 or less; and
• Not more than 25% of the loan amount is used for qualified non-payroll costs.

Based on U.S. Treasury and SBA Interim rules and guidelines, if a portion of the loan is not forgiven, the remaining amount of the loan is due and payable within 2 years, accruing interest at 1% per annum. Interest and principal payments are deferred for a 6-month period from the date of the loan, though interest will accrue during that 6-month deferment period. The Act further provides that the amount forgiven will be tax-free for federal purposes.

The PPP Loans are intended to help companies who are impacted by the COVID-19 pandemic to retain their employees and assist in covering certain specified qualified costs

The maximum amount of your PPP loan that is eligible for forgiveness is equal to the amount spent on qualifying expenses during the eight-week benefit period. Qualifying expenses include:

• “Payroll costs” including salary, wages, and commissions (up to a maximum annualized amount of $100,000 per employee), group healthcare benefits, medical or sick leave, retirement benefits, and state or local taxes assessed on the compensation of employees. Payroll costs should also include severance pay and bonuses, subject to the annualized cap, subject to further SBA guidance.
• Interest on mortgage obligations (for mortgages originated prior to )
• Rent under a lease agreement (for leases in force prior to )
• Utilities (electricity, gas, water, transportation, telephone and/or internet placed in service prior to )

It is noted that many companies may own the real estate their business occupies, often in a separate affiliated entity. It is not yet known whether the qualifying expense in this scenario will be the rent paid to the affiliate or the interest on the mortgage the affiliate pays, which is likely a smaller amount. Hopefully, the SBA will provide clearer instructions in their final guidance to be issued.