These business owners who took PPP money will have their loan forgiveness reduced

  • Aside from setting up the forgivable Paycheck Protection Program, the CARES Act also provided small businesses access to a grant of up to $10,000 when applying for an Economic Injury Disaster Loan.
  • Funding for the so-called EIDL Advance dried up on July 11, after issuing more than $20 billion in emergency funding to nearly 6 million small businesses.
  • Businesses with both a PPP loan and an EIDL Advance will have a reduction in the amount forgiven from the paycheck protection loan.

Entrepreneurs who received up to $10,000 in federal grants and took a forgivable Paycheck Protection Program loan as well are in for a surprise: They won't be getting the full loan forgiveness they had hoped for.

The CARES Act offered small businesses a couple of lifelines this spring.

First, it established an emergency grant program, giving business owners grants when applying for an Economic Injury Disaster Loan.

The EIDL Advance offered $1,000 in grant money for each employee, up to $10,000. Independent contractors were also eligible for up to $1,000. 

The CARES Act also created the Paycheck Protection Program, a loan that entrepreneurs could use to cover payroll, rent, and other expenses.

The sweetener for many borrowers is that the loan is forgivable if they devote at least 60% of the proceeds to payroll expenses. Even those who fall short of the threshold may be eligible for partial forgiveness.

Cash-strapped business owners who received an EIDL Advance and took out a PPP loan as well are discovering that PPP forgiveness won't be as generous as they may have anticipated.

That's because the Small Business Association will deduct the grant from the amount of PPP forgiveness that a borrower may receive.

Further, borrowers who received EIDL Advances that were larger than the PPP loan won't be eligible for forgiveness on the paycheck protection loan, according to an Aug. 11 set of frequently asked questions issued by the SBA.

The issue is front of mind for entrepreneurs as they begin to hash out forgiveness. Indeed, the SBA began receiving forgiveness applications from lenders this week.

"Free money may seem easy to get, but you'll need to be cognizant of how these grants and loans are treated so that you can better prepare," said Sheneya Wilson, CPA and founder of Fola Financial in New York.

PPP vs. EIDL

Even if firms are on the hook to repay a PPP loan, they're getting attractive terms. Those loans are subject to an interest rate of 1% and borrowers have a six-month grace period before making repayments.

Loans issued before June 5 generally must be repaid in two years, while those issued after that date mature in five years.

Meanwhile, to get an EIDL Advance, businesses generally had to apply for an EIDL loan. That is, they could borrow up to $150,000 at a rate of 3.75%. Repayments are deferred for a year, and borrowers get 30 years to repay.

There is no forgiveness for EIDL loans. 

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Earlier in the year, tax professionals recommended clients apply for one or the other, rather than both programs. The reduction in PPP forgiveness due to the EIDL Advance was a factor.

"It's a concern because there will be some people who are going to be very wide-eyed when they don't get full forgiveness," said Adam Markowitz, enrolled agent at Howard L Markowitz PA CPA in Leesburg, Florida.

"It's still going to come as a shock to them when they have to pay [the grant] back."

Indeed, one client who took an $80,000 PPP loan and received a $6,000 EIDL Advance is preparing to repay the grant, he said.

"I'm going to tell him to just write out a check," Markowitz said.      

Cash flow

Plenty of questions remain on whether PPP forgiveness will undergo further changes, particularly as Congress continues hitting roadblocks to passing another Covid-19 relief bill.

In the meantime, tax professionals are managing clients' expectations if they took both the EIDL Advance and the PPP loan. They're also helping clients round up the necessary paperwork for forgiveness.

At the very least, it helps business owners get a sense of their cash flow so they can set aside the money they'll need for repayment, Wilson said.

"Some of the lenders aren't taking applications yet for forgiveness, but let's at least have things prepared so that we can submit the paperwork and get what we need to have forgiven and pay back what was loaned to us," she said.

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