As of Aug. 4, 2020, 5,136,072 forgivable paycheck protection program (PPP) loans had been approved by the Small Business Administration (SBA). And on Oct. 8, 2020, the SBA revealed a simpler loan forgiveness application for loans of $50,000 or less.

Economic injury disaster loan (EIDL) forgivable advances were halted July 15, 2020, but not before 5,781,390 had also been approved. If your small business was among those fortunate enough to receive an EIDL loan advance or hope to claim a PPP loan before the August 8, 2020 deadline, 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 offered forgiveness of an up-to-$10,000 loan advance.
  • PPP loans up to $10 million can be completely forgiven.
  • EIDL forgiveness was automatic, provided you spent the money properly.
  • PPP forgiveness requires an application with the lender.
  • The Paycheck Protection Program Flexibility Act and subsequent guidance from the SBA expanded the original PPP program in several important ways.
  • New EZ and Revised Forgiveness Applications are now available.

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 featured an up-to-$10,000 forgivable loan advance and continues to offer 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 was just $3,459 and the average forgivable PPP loan so far has been $101,782. 

Although the EIDL advance part of the EIDL program has expired, you have until Dec. 16, 2020, in most states, to apply for a non-forgiveable EIDL loan. Barring new financing or an extension of the EIDL advance or PPP loan program, those avenues are or will be closed as of Aug. 8.

If you have already received a PPP loan or one is still being considered, you will want to pay careful attention to the forgiveness process.

EIDL: Advances and Loans

The EIDL Loan program includes a forgiveable advance and a loan portion that must 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 July 15, 2020, SBA EIDL advance funds were no longer available. EIDL loan applications may be made until Dec. 16, 2020 in most states.

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 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" Others, including Bench Accounting, suggest the advance will need to be included in taxable income.  

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.

Passage of the PPP Flexibility Act of 2020 on June 5, 2020, made important changes to PPP loan forgiveness that extend the amount of time you have to spend the money, lower the percent that must be spent on payroll, and more.

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;
  • Are unable to retain or rehire staff due to compliance with legal COVID-19 requirements; and/or
  • Are unable to find and hire suitable replacement employees

Instead, you can exclude those employees from the loan-forgiveness reduction calculation required under the Act, according to a new Treasury Dept. FAQ and the PPP Flexibility Act. 

Additional PPP forgiveness requirements

Along with using PPP loan funds for permitted uses, you must also adhere to some additional requirements under the PPP Flexibility Act, which became law June 5, 2020 and follow-on guidance released August 4, 2020 by the SBA and Department of the Treasury.  

  • You now have 24 weeks from the first distribution of any loan amount (or Dec. 31, 2020, whichever comes first) to spend your loan funds.
  • Payroll costs must make up 60% (previously 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 40% (previously 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) all full-time equivalent employees according to the baseline used to establish your loan, except as described in the Tip box above. You must do this within 24 weeks of receiving your loan or by Dec. 31, 2020, whichever comes first.
  • The amount forgiven will also be reduced in proportion to any reduction in employee salary or wages during the 24-week forgiveness period greater than 25% of the average amount that employee made during the base period. The Aug. 4 guidance clarifies that a reduction in benefits does not count in this calculation.
  • The Aug. 4 guidance further provides that if you have any ownership interest in an S corporation, C corporation, partnership or sole proprietorship (Schedule C business), the maximum personal compensation you can count toward forgiveness for all companies you own is limited to the lesser of $20,833 or 20.833% of your 2019 compensation.Health insurance and retirement plan costs are not part of the cap proscribed in the Aug. 4 guidance.

You have the option to stick with the original 8-week covered period if you received your loan before enactment of the PPP Flexibility Act of 2020. This might apply if you can't reasonably retain or rehire your entire workforce for the new 24-week covered 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 Flexibility Act payroll tax deferment

The PPP Flexibility Act of 2020 lets businesses that took PPP loans also delay paying their payroll taxes. This was not allowed under the original CARES Act that established the PPP loan.

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 8- or 24-week period following disbursement of your loan (depending on your election). 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 for 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."

New Revised Forgiveness Applications Now Available

On June 17, 2020, the SBA and Treasury Department announced a revised, scaled-down (5 pages vs. 11) Paycheck Protection Program (PPP) loan forgiveness application that incorporates changes made by the PPP Flexibility Act of 2020. At the same time SBA published a new 3-page EZ version of the application if you:

  • Are self-employed and have no employees; OR
  • Did not reduce the salaries or wages of your employees by more than 25%, and did not reduce the number or hours of your employees; OR
  • Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of your employees by more than 25%.

According to the SBA the EZ application requires fewer calculations and less documentation. Both applications remind you of the option to use the original 8-week covered period (if your loan was made before June 5, 2020) or the extended 24-week covered period, if that is your preference.

PPP Loan Forgiveness Application Form 3508EZ (PDF)

PPP Full Loan Forgiveness Application Revised June 16, 2020 (PDF)

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 five-year loan at 1% interest. Loan payments on permitted use, including principal, interest, and fees are deferred until the SBA remits your forgiveness amount to you or, If you do not apply for forgiveness, for 10 months from the end of your loan-forgiveness covered period.

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?