As the COVID-19 pandemic hit the U.S., thousands of businesses across the nation were left scrambling to figure out what to do. Some businesses were fortunate enough to qualify and receive disaster loan funds from the Small Business Administration. These funds, designed to keep employees on the payroll and businesses afloat, provide partial or full loan forgiveness. However, businesses must meet the requirements in order to have their loans forgiven.
It’s crucial that business owners are not only aware of these requirements, but are taking active steps to meet the guidelines. Here’s some information that you should know to help ensure you’re on the right track to loan forgiveness.
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What are EIDL and PPP loans?
The two main government loan programs offered in response to COVID-19 are the Economic Injury Disaster Loan (EIDL) program and the Paycheck Protection Program (PPP). Both programs offer loans that can be forgiven.
The SBA EIDL program offered up to $10,000 in a forgivable loan advance and continues to offer loans for up to $2 million. The loan advance part of the EIDL program expired. However, you have until December 16, 2020 (in most states) to apply for a non-forgivable EIDL loan.
The SBA PPP loan program is a new form of the SBA 7a loan program. PPP funds come from SBA-approved third-party lenders that offer forgivable loans of up to $10 million. However, most advances and loans have been disbursed in amounts smaller than the maximum. The average forgivable PPP loan is $100,729.
For those who have received PPP funding or are being considered for funding, it’s crucial that you pay close attention to the forgiveness requirements.
What are the requirements for getting my EIDL or PPP COVID-19 small business loan forgiven?
For both the EIDL and the PPP loans, some or all of the funding can be forgiven. Know what you can and can’t use your funds for in regards to your business, or you risk having to pay back what could have been otherwise forgiven.
EIDL Permitted Uses
The EIDL, minus the forgiven portion, is a loan, payable over up to 30 years (depending on your ability to repay) with an interest rate of 3.75%. The EIDL also includes an automatic one-year deferral on repayment, although interest will continue to accrue.
One nice feature for EIDL recipients is that there is no formal application to get the advance forgiven. The $10,000 advance, once received, can be used immediately and may be forgiven as long as the funds were used for the following expenses:
- Paid leave.
- Maintaining payroll.
- Increased costs of materials.
- Mortgage, lease, or rent payments.
- Other obligations that can’t be met due to revenue loss.
The EIDL advance should not be used for:
- Replacing lost sales or profits.
- Business expansion.
- Refinancing long-term debt.
Although there currently isn’t an accounting requirement for the advance funds, it’s strongly recommended that business owners keep a detailed log of how the funds were used. If it’s discovered that you’ve used all or part of your advance for non-permitted uses, it won’t qualify for forgiveness and then you would need to pay back the funds.
PPP Permitted Uses
Your PPP loan may be forgiven if you use the money for:
- Salary, wages, commissions, and tips (up to $100K per employee).
- Benefits, including vacation, and parental, family medical, or sick leave.
- State and local taxes on compensation.
- Rent or mortgage interest.
PPP loans shouldn’t be used for:
- Salaries over $100K.
- Payroll outside the US.
- Employer federal FICA tax credits.
- Employer FFCRA credits.
- Mortgage or debt principal.
Are there exceptions to the EIDL and PPP loan forgiveness requirements?
If you accept PPP funding, you’re required to use the money as directed. However, there are a few notable exceptions:
- If you extend a good-faith, written offer to rehire a previously laid-off employee and the employee turns it down.
- If you’re unable to retain or rehire staff due to compliance with legal COVID-19 requirements.
- If you are unable to find and hire suitable replacement employees.
How do I stay up-to-date on changes or updates to coronavirus relief laws?
Legislation for COVID-19 small business relief has continued to evolve as the economic impact of the pandemic has reached the farthest corners of the nation. Anyone who has received or may receive COVID-19 disaster relief funds would do well to stay informed on any updates.
For example, the PPP Flexibility Act, which became law on June 5, 2020, with additional guidance released on August 4, 2020, outlines other requirements to achieve loan forgiveness. Here are some of the new requirements:
- Loan recipients have 24 weeks from the first date of distribution of any loan amount (or Dec. 31, 2020, whichever comes first) to spend loan funds.
- Payroll costs must account for 60% (previously 75%) or more of the forgivable amount.
- Non-payroll costs can account for 40% (previously 25%) or less of the amount forgiven.
- To receive full forgiveness, recipients must retain (or rehire) all full-time equivalent employees according to the baseline used to establish your loan. (Recipients must do this within 24 weeks of receiving their loan or by December 31, 2020, whichever comes first.)
As you can see, there are some important updates that were made to the PPP that could greatly affect recipients’ usage of the funds.
Do I have to file an application for EIDL or PPP loan forgiveness?
Unlike the EIDL advance, which is automatically forgiven, PPP forgiveness requires an application.
Information you’ll need to provide includes:
- The total amount requested to be forgiven.
- Verification of the number of full-time employee equivalents on payroll and their pay rates, IRS payroll tax filings and state income, payroll, and unemployment insurance filings.
- Verification of mortgage interest, rent/lease obligations, and utilities payments.
- Certification from an authorized representative of your company that your documentation is correct and that the amount requested for forgiveness complies with PPP guidelines.
In June, the SBA and Treasury Department simplified the application for forgiveness of loans. The revised documents can be found here:
The EIDL and PPP loans are still relatively new and thus could undergo more changes as time goes on and depending on how the economy stabilizes in the wake of COVID-19. Stay up-to-date with the latest COVID-19 disaster loan legislation so you and your business can make the most out of your funds – and have the maximum amount forgiven. If you have questions about your specific business situation, you should speak to an accountant to learn how you can make sure your loans are forgivable.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.