What to Do With EIDL and PPP Funds
For farmers who have received PPP and EIDL funds through the CARES Act, knowing how to use them in tandem is important. This article is a compilation of information from SBA, Bench.co., and wilmerhale.com. Please note, rules regarding forgiveness are still in development, so stay tuned for guidance as it becomes available. Hang in there, folks.
EIDL and PPP Program Summary
|Maximum loan amount||$2 million||$10 million|
|Forgivable?||Only $10k loan advance/grant||Yes*|
|Collateral required?||Possibly, depending on loan amount||No|
|Credit check required?||Yes||No|
|Automatic payment deferral||12 months||6 months|
|Where do I apply?||SBA website||Directly from an approved lender|
|Loan terms||3.75%, up to 30 years||1%, 2 years|
|Approved uses of loan funds||-Fixed debts (rent/mortgage payments, utilities, etc.)
-Sick leave directly related to COVID-19-Increased costs of materials unavailable from original sources due to supply chain issues-Some bills that could have been paid had the disaster not occurred-Repaying obligations that cannot be met due to revenue losses
|*Payroll expenses for 8 weeks plus 25% is the amount for PPP that may be forgiven. Loan amounts above that amount will likely not be forgiven due to the high participation rate in this program through the CARES Act.|
EIDL Loan v/s EIDL Loan Advance (Grant)
The definition of permitted use of EIDL funds is broad: financial obligations and operating expenses that could have been met had the COVID-19 disaster not occurred. EIDL is a loan program through SBA; SBA also offers an EIDL Loan Advance of up to $10,000 that is, basically, a grant that does not have to be repaid. $10,000 is the maximum for an EIDL Loan Advance. Currently, the SBA is providing $1,000 per employee, up to ten employees (and if you’re a sole proprietor, you’re eligible for $1,000 only).
This grant is not included by default and must be officially requested. On the current SBA applications, this is very easy—just check the box that says, “I would like to be considered for an advance of up to $10,000.”
If you filled out the old application (without the option for opting in to the grant), you will need to reapply using the new system. The SBA has been saying you won’t lose your initial place in the queue, and the second application serves as a request for the grant.
PPP Fund Usage
For PPP loans, at least 75% of the loan must be used to fund payroll and employee benefit costs in order to be eligible for forgiveness. The remaining 25% may be spent on mortgage interest payments, rent, and utilities.
Your PPP loan is calculated based on wages that employment and self-employment taxes have been paid on. This generally comes in the form of the following:
|Entity type||Taxed wage type||Where to find it|
|Sole proprietorships & Single-Member LLCs||Net profit||Form 1040 Schedule C|
|Partnership LLCs||Net profit||Form 1065 and associated K-1s|
|Corporations||Payroll expenses||Payroll reports|
Similar to draws and distributions, 1099 contractors are not included in the PPP calculation, even if they are regularly paid for employee-like tasks. This is because contractors are considered sole proprietors and can apply for the PPP themselves.
It’s important to note that the PPP is primarily meant to help employers pay their employees throughout the 8-week period after receiving the loan. That is why at least 75% of the loan must be used towards payroll expenses in order to be considered for loan forgiveness. What this means for you is that if you have large expenses outside of payroll, your PPP funds will be limited in the amount you can use towards them in order to still qualify for loan forgiveness.
EIDL and PPP – How to use these together
The EIDL loan advance/grant can be used for maintaining payroll, proving sick leave to employees, rent or mortgage payments, and other obligations. However, recipients may not use the EIDL funds for the same purpose as the PPP funds. The PPP funds should be used primarily for payroll expenses in order to be considered for forgiveness; use the EIDL funds for other allowable expenses (still vague at this point on May 6, 2020!). We do know a few ineligible uses for EIDL funds, however, that include the following:
- Dividends and bonuses
- Disbursements to owners
- Repayment of stockholder/principal loans
- Expansion of facilities or acquisition of fixed assets
- Repair or replacement of physical damages
- Refinancing long term debt
If you receive an EIDL advance and a PPP loan, proceeds from the advance will be deducted from the loan forgiveness amount. It’s important to remember that the SBA and the U.S. Treasury are still working on rules for calculating forgiveness, and they may change as further guidance is issued. To maximize forgiveness, use at least 75% of what gets forgiven on payroll costs.
Still, remember that this is a “payroll protection” program, not a small business protection program. The intention of Congress in creating the PPP was to keep U.S. workers employed. For that reason, small business owners should make an effort to meet the 75% threshold—especially if they want a portion of the loan to be forgiven.