If the COVID-19 pandemic negatively affected your business, you’re not alone. Over 100,000 small businesses have permanently shut down operations since March. Millions more have seen drastic declines in sales and revenue because of the pandemic. As a result, Congress passed the CARES ACT to provide relief funds to struggling businesses.
A portion of the CARES Act issued over $800 billion in aid to small businesses, with the bulk of it coming in the form of the forgivable Paycheck Protection Program. However, now that loan applications have been submitted and approved, and the money has been distributed, businesses should focus on a crucial next step: ensuring the loan gets forgiven.
SBA Disaster Loan Programs That Offer Forgiveness
Two of the disaster loan programs not only provide funds to struggling businesses but also have the potential for loan forgiveness. The Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) are designed to provide economic relief to businesses and have different requirements and incentives.
Paycheck Protection Program
The main goal of the Paycheck Protection Program is to provide aid and incentivize businesses to keep employees on the payroll. While the Paycheck Protection Program is a Small Business Administration loan, it does not come directly from the SBA. Instead, commercial lenders like banks and credit unions work with the SBA to disburse PPP loans. PPP loans are also forgivable for small business owners under certain circumstances.
As of July 6, 2020, the Paycheck Protection Program renewed the application with an updated deadline of August 8, 2020.
Economic Injury Disaster Loans
EIDLs are loans sent from the Small Business Administration that aim to provide aid to businesses that experienced a temporary loss of revenue. You can receive up to $1,000 to pay for immediate costs for your business.
EIDL business owners and independent contractors can use proceeds to cover a wide variety of expenses, such as the continuation of health care benefits, rent, utilities, and fixed debt payments.
The SBA resumed acceptance of new Economic Injury Disaster Loan (EIDL) applications on June 15 to all qualified small businesses, including U.S. agricultural businesses.
One of the main features of the coronavirus relief programs is the ability to have the loans forgiven. However, although your application was approved and you received the funds, that doesn’t automatically mean your loan will be forgiven. Each program comes with its own set of forgiveness qualifications.
PPP loans qualify for forgiveness if the funds go towards payroll expenses, mortgage interest, rent, and utilities.
Up to $10 million in Paycheck Protection Program loans are forgivable under the following conditions:
- The employer maintains or quickly rehires employees and maintains salary levels
- At least 60% of the forgivable amount must be dedicated to payroll
- Forgiveness reduces if full-time headcount declines, or if salaries and wages decreases
Businesses with less than 500 employees and sole proprietorships can receive up to $10,000 of a loan advance from the EIDL can be forgiven. It’s important to note that the advance is considered part of the EIDL loan. Even if you receive approval for the advance but are denied or decline the EIDL, you don’t need to pay back the advance.
To have the advance forgiven, you need to use the funds for the following expenses:
- Paid leave
- Payroll maintenance
- Increased costs of materials
- Mortgage, lease, or rent payments
- Other obligations that can't be met due to revenue loss
The following expenses don’t qualify for EIDL advance fund forgiveness:
- Replacement of lost revenue or profits
- Business expansion
- Refinancing long-term debt
If you have concerns or questions about achieving maximum forgiveness of your EIDL or PPP loan, consult with a professional accountant or bookkeeper. They can advise you on which expenses do or don’t qualify for forgiveness.
To apply for disaster loan forgiveness via the EIDL loan, visit the Small Business Administration’s website. To apply for disaster loan forgiveness via the PPP loan, contact, or visit your financial institution for further information.
Things to Note
If your business has less than 500 employees or if you’re a sole proprietor, you can qualify for both EIDL and PPP loans. However, there are critical differences in the amounts you can borrow.
EIDL allows small business owners to borrow up to $2 million at a maximum interest rate of 3.75%. If you borrow less than $200,000, you don’t need personal guarantees. The SBA will request collateral if your loan exceeds $25,000, but if you can’t provide it, that doesn’t mean you’ll automatically be disqualified.
Good bookkeeping is essential if you want to achieve maximum forgiveness, so be sure to log your transactions in your books. Whether you use a bookkeeper or do it yourself, all transactions need to be recorded accurately.
If you’re unsure how to apply for an EIDL or PPP loan or how to use the funds so they can be forgiven – consult with an expert. An accountant will be able to provide answers specific to your situation and business.
Author Bio: 1-800Accountant's goal is to help new businesses grow. Our team of accounting professionals get small businesses started right by offering tax advice, bookkeeping, and payroll individually, as well as bundled together in convenient packages. Find us on Facebook and Linkedin.