As of mid-April 2020, 1,661,367 forgivable paycheck protection program (PPP) loans and 755,476 forgivable economic injury disaster loan (EIDL) advances had been approved by the Small Business Administration (SBA). If your small business is among those fortunate enough to receive a loan or loan advance before the June 30, 2020, deadline for PPP loans (December 16, 2020 for EIDL), your next major hurdle will be to ensure the amount you receive is actually forgiven. 

Key Takeaways

  • Both the EIDL and PPP programs provide partial or full loan forgiveness.
  • EIDL offers forgiveness of an up-to-$10,000 loan advance.
  • PPP loans up to $10 million can be completely forgiven.
  • EIDL forgiveness is automatic, provided you spend the money properly.
  • PPP forgiveness requires an application with the lender.

Two Programs: EIDL and PPP

Two government loan programs offer forgiveness during the COVID-19 crisis:

  • The existing SBA EIDL program is run by the SBA with funds coming from the government. This program features an up-to-$10,000 forgivable loan advance and an up-to-$2 million loan.
  • The SBA PPP loan program is a new form of the SBA 7a loan program. PPP funds come from SBA-approved lenders that offer forgivable loans of up to $10 million. Most advances and loans so far have been much smaller than the maximum.

The average forgivable EIDL advance during COVID-19 has been $4,360 and the average forgivable PPP loan, $206,000. 

If your business has fewer than 500 workers, you are likely eligible for either program and you can apply for both, provided you don't use the money from either loan for the same expense. You can also refinance an EIDL loan into a PPP loan and, under certain circumstances, must do so.

EIDL: Advances and Loans

The EIDL Loan program includes an advance that is forgiveable and a loan portion that will need to be repaid. Here is how the process works.

EIDL advance

Of the two, EIDL loan advance forgiveness is the easiest to understand and comply with. Your EIDL advance is considered part of the EIDL loan that you apply for along with the advance. If you receive the advance and are subsequently denied or decline the EIDL, you still don't have to pay the advance back.

As of May 4, 2020, the SBA is only processing new EIDL and EIDL Emergency Advance applications from agricultural businesses.

If you accept an EIDL, the loan itself will not be forgiven. The only part that is forgiven is the loan advance of up to $10,000. You also need to know that the forgivable loan advance is not a flat $10,000 but $1,000 per employee with a maximum of $10,000 (10 or more employees). 

EIDL advance: permitted uses

Your EIDL advance will not have to be repaid provided that you use 100% of the money for:

  • Paid leave
  • Maintaining payroll
  • Increased costs of materials
  • Mortgage, lease, or rent payments
  • Other obligations that can't be met due to revenue loss

EIDL advance: non-permitted uses

You may not use your EIDL advance (or loan) for:

  • Replacing lost sales or profits
  • Business expansion
  • Refinancing long-term debt

Consequences of EIDL non-permitted use: If you use all or part of your advance (or loan) for non-permitted uses, it will not be forgiven and may be subject to immediate payback.

Since the EIDL loan and loan advance are considered disaster funds, if the SBA determines you misused the funds, the penalty could be immediate repayment of one-and-a-half times the original loan amount, plus possible criminal charges.

Your EIDL loan advance will be deducted from the forgivable part of any subsequent PPP loan you receive.

EIDL advance: tax treatment

To date there has been no specific guidance on the tax treatment of the advance. Tracie Britton of bookkeeping, operations, and client management firm, Britton Management says she has been working on the assumption that "the EIDL advance will be treated like a non-taxable grant." 

EIDL loan

Your EIDL, minus the forgiven portion, is a loan, payable over up to 30 years (depending on your ability to repay). That loan, provided you adhere to the terms, is at 3.75% interest and includes an automatic one-year deferral on repayment although interest will continue to accrue.

EIDL Forgiveness: No Application Needed

As discussed, the only part of an EIDL loan that can be forgiven is the advance. There is no formal application process for EIDL advance forgiveness. Once you receive the funds, you are free to use them immediately. The only requirement is that you must spend the advance only for expenses listed above. Although there is no application or accounting requirement, you should keep a detailed record of how you spend advance funds in the event the SBA has questions at a later date.

PPP Loan

Since the entire PPP loan is subject to forgiveness, the rules are different for this program and considerably more involved than those for the EIDL advance. Unlike EIDL loans and advances, PPP loans are made through an SBA-approved lender creating another layer of bureaucracy.

When you accept a PPP loan, you do so with the understanding that any part of the loan that is not forgiven will have to be paid back. As with EIDL, with PPP you apply for a loan first. With EIDL, the grant is forgiven automatically. With PPP you must seek forgiveness after you have spent the money.

Permitted uses

Your PPP loan may be forgiven if you use the money for:

  • Salary/wages/commissions, tips (up to $100K per employee)
  • Benefits including vacation, parental family medical or sick leave
  • State and local taxes on compensation
  • Utilities
  • Rent/mortgage interest
  • Interest on debt in place as of Feb. 15, 2020+

+ This is a permitted but not forgivable use (see below).

Non-permitted uses

You may not use your PPP loan for:

  • Salaries over $100K
  • Payroll outside the US
  • Employer federal, FICA tax credits
  • Employer FFCRA credits
  • 1099s
  • Mortgage or debt principal

Consequences of PPP non-permitted use: If you use all or part of PPP loan for non-permitted uses, it will not be forgiven and may be subject to immediate payback.

You will not lose PPP loan forgiveness if you make a good-faith, written offer to rehire a laid-off employee (same hours, same wages) and have documented evidence of being turned down by the employee. Instead, you can exclude that employee from the loan-forgiveness reduction calculation required under the Act, according to a new Treasury Dept. FAQ 

Additional PPP forgiveness requirements

In addition to using PPP loan funds only for permitted uses, you must also adhere to some additional requirements.

  • Payroll costs must make up 75% or more of the amount forgiven. This includes the first three categories listed under permitted uses above.
  • Non-payroll costs can make up no more than 25% of the amount forgiven and are defined as the last three categories under permitted uses.
  • To receive full forgiveness, you must retain (or rehire by June 30, 2020) all full-time equivalent employees according to the baseline used to establish your loan, except for any fully documented instances in which an employee refuses the rehire offer (see "Tip," above).
  • The amount forgiven will also be reduced in proportion to any reduction in employee salary or wages during the eight week forgiveness period greater than 25% of the average amount that employee made during the base period.

PPP loan tax treatment

The IRS has ruled that any forgiven part of a PPP loan is exempt from being taxed as a "discharged debt." This means you do not have to declare the forgiven part of your loan as income when you file taxes for 2020 in 2021.

PPP Loan Forgiveness: You Need to Apply

The CARES Act requires that you apply to your lender for loan forgiveness at the end of the eight-week period following disbursement of your loan. To apply you must submit the following:

  • The total amount requested to be forgiven
  • Verification of the number of FTEEs (full-time employee equivalents) on payroll and their pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings
  • Verification of your payments on covered mortgage interest, rent/lease obligations, and utilities
  • Certification from an authorized representative of your company that the supplied documentation is true and that the amount that is being forgiven complies with PPP guidelines

Your lender must make a decision on your application for forgiveness within 60 days.

Because of the complexity of PPP loan forgiveness and the unanswered questions (see below) about how the process works, Britton advises that employers keep meticulous records of all PPP-related spending. "Track and document everything," she says. "If you think it might be a pertinent expense, record it."

PPP Amount Not Forgiven: Payback Required

Any part of your PPP loan that is not forgiven must be paid back, either immediately, in the case of non-permitted use, or in the form of a two-year loan at 1% with a six-month deferment in the case of permitted but not forgivable amounts.

An example of a permitted but not forgivable use would be utility costs that push your non-payroll expenses over 25% of the amount forgiven. Another example would be interest on non-mortgage debt in place on Feb. 15, 2020.  

PPP Unanswered Questions

As much as is known about the Paycheck Protection Program, there is just as much that is not known. As guidance becomes available and to the extent it answers any of these questions, information will be added to this article.

  • Are health benefits you pay for furloughed employees forgivable?
  • Similarly, is vacation pay for terminated or resigned employees forgivable?
  • Can you claim transportation expenses under utilities?
  • What about reimbursement of home office expenses for remote workers?
  • Will forgiveness trigger an IRS audit?
  • Can you prorate allowable expenses if they started before the eight-week period, i.e. rent paid Apr. 1 for an eight-week period that starts Apr. 15?