The COVID-19 pandemic left millions of businesses struggling to stay afloat. Between lockdowns, quarantine, and uncertainty over the future, small business owners found themselves stuck between a rock and a hard place. Unfortunately, some were forced to make the difficult decision to close down operations, and many of those had to do so permanently. Luckily for other businesses, aid came in the form of disaster relief funds.
Now that over 5 million businesses have received COVID relief funds, another important question arises for small business owners: How can they ensure the loans are forgivable? It's important to keep loan forgiveness in mind from the moment you receive your funds. Otherwise, you could find yourself blindsided later if you don't meet the eligibility requirements for forgiveness.
Here are the key takeaways for small business owners:
Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program Loan (PPP) loans are eligible for some degree of loan forgiveness.
The EIDL advance grant is forgivable, up to $10,000.
EIDL advance grant forgiveness is automatic.
PPP loans up to $10 million can be forgiven.
PPP loan forgiveness requires submission of an application to the lending institution.
Who funds disaster relief?
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is a $2.2 trillion economic stimulus bill passed by Congress and signed into law on March 27, 2020. The CARES Act offers several options for loans to struggling small businesses. In addition to eligibility requirements, some loans come with qualifications that must be met to achieve forgiveness.
The CARES Act established the Coronavirus Relief Fund and appropriated $150 billion. Under the CARES Act, the Coronavirus Relief Fund can make payments for specified uses to states and certain local governments, the District of Columbia and U.S. territories, and citizen governments.
Depending on which loan program you applied for, your relief funds could either come from the government or a local lending institution working in partnership with the Small Business Administration (SBA).
What disaster loan programs offer loan forgiveness?
Under the CARES Act, there are two disaster loan programs that offer varying degrees of loan forgiveness: the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program Loan (PPP). While both of these loans benefit business owners, their approaches to doing so differ in terms of amounts, how the funds are sent and what expenses they can cover.
The SBA sent out EIDLs. As of April 2020, applicants could receive up to $1,000 to pay for immediate costs for small businesses or private nonprofit organizations as part of a grant program. However, on July 11, 2020, the SBA announced it would no longer disburse grant advances under the EIDL.
Commercial lenders that work with the SBA disburse PPP loans. PPP loans, which closed on August 8, 2020, are also forgivable for small business owners under certain circumstances. The maximum loan amount available to borrow through the PPP is equal to 2.5 times the business's average monthly payroll costs or $10 million, whichever amount is lower.
What are the qualifications for forgiveness for the EIDL?
The amount of the grant was determined by the number of employees indicated on the EIDL application: Businesses could receive $1,000 per employee, with a maximum of $10,000. While the grant seems simple enough, there are a few things you should keep in mind:
Recipients did not have to be approved for an EIDL loan to receive the EIDL advance.
The amount of the loan advance was deducted from total loan eligibility.
Businesses that received an EIDL advance in addition to the PPP loan will have the amount of the EIDL advance subtracted from the forgiveness amount of their PPP loan.
The EIDL advance can be used for the following:
Costs incurred due to supply chain disruption
Mortgage or lease payments
Repaying obligations otherwise unable to be met due to revenue loss
The EIDL advance funds are not intended to cover lost sales, business expansion or refinancing long-term debt.
How to apply for EIDL advance grant forgiveness
Unlike the PPP, there is not a forgiveness application that needs to be submitted to have the EIDL advance forgiven. However, it's a smart idea to keep documentation of how you spent the advance funds. If, in the future, you need to prove you qualify for the advance grant forgiveness, you'll have the records to prove it.
At this time, the IRS has not yet clarified whether or not the EIDL advance is taxable.
What are the forgiveness qualifications for the PPP?
PPP forgiveness hinges on the employer's ability to maintain or quickly rehire their employees and maintain salary levels. If full-time headcount declines or salaries and wages decrease, forgiveness reduces. There are also certain expenses that qualify for forgiveness, and others that do not.
Permitted use of PPP funds that qualify for forgiveness include the following:
Salary/wages/commissions/tips (up to $100,000 per employee)
Benefits such as paid vacation and parental, family, medical or sick leave
State and local taxes on compensation and wages
Rent or mortgage interest
Interest on debt in place as of February 15, 2020
The following expenses are not eligible for forgiveness under the PPP:
Payroll outside the United States
FICA tax credits
Salaries over $100,000
Mortgage or debt principal
How to apply for PPP forgiveness
When it comes to your PPP funds, you should meticulously track your expenses and keep any relevant information or paperwork on file. Organized and clear records will ensure your application has the strongest chance of full forgiveness.
In order to reduce compliance burdens and simplify the process for borrowers, there is a simplified forgiveness application for organizations and businesses that borrowed less than $50,000. The form includes the following:
Options for borrowers to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers' regular payroll cycles.
Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the 24-week period after receiving the PPP loan.
Step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness.
Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30.
The addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that were declined.
Borrowers submit their forgiveness applications to the commercial lending institutions that disbursed the funds to them rather than to the SBA. Once the financial institution receives it, they have 60 days to review the application and make a recommendation to the SBA on forgiveness. The SBA then has 90 days to review the recommendation and, if approved, will remit the amount forgiven to the lender.
If you're unsure how to apply for loan forgiveness – or if you have questions about what expenses qualify for forgiveness – don't hesitate to speak to an expert. A professional accountant will be able to provide loan forgiveness guidance specific to your business, employees and personal situation.