The most popular part of CoronaTax was the “Free Money!” and if you have a business or real estate, that meant the two SBA programs, Paycheck Protection Plan (PPP) and Economic Injury Disaster Loan (EIDL).
The PPP was a loan based on payroll. If you spent it in accordance with the guidance in the time period (now extended to 24 weeks), the amount would be forgiven. The loan, in all or in part, became a grant. It is available for small businesses and non profit organizations.
The EIDL was a loan available for small businesses, non profit organizations and real estate investors. That’s a big change as a result of CoronaTax. Real estate investors can now also get SBA loans, or at least this one.
EIDL also has a grant possibility, based on the number of employees. You can receive $1,000 per employee in a grant that you don’t have to pay back. Otherwise, the EIDL is a loan that you will have to pay back. But, it’s a good loan at just 3.75% interest and fully amortized for 30 years. Plus, you have a year before you have to start making payments.
If you qualify for both the PPP and EIDL, you can have both. But now comes the big question, how does it work if you have both loans? How do they work together?
First, let’s look at how you decide which expenses can be used for which loans. There is some overlap, but you can’t use one expense for them both. It’s one loan or the other.
PPP funds can be used for qualified payroll costs, rent, mortgage interest and utilities. Newly updated rules have told that us 60% or more of the funds must be used for qualified payroll costs and the rest is available for rent or mortgage interest and utilities.
EIDL fund uses are more broadly defined. You can use those for financial obligations (including credit card payments, consumer debt and property loans) and operating expenses that could have been met if the pandemic hadn’t occurred.
What happens if you get an EIDL loan first and later get a PPP?
If you got an EIDL prior to 4/3/2020 and used it for payroll expenses, you must refinance the EIDL by carrying over the balance into your PPP loan. That’s not a horrible deal, since you’re going to be trading in a 3.75% interest loan for a 1% interest loan (PPP), but you are also changing a 30-year amortization for a 5-year amortization.
If you get an EIDL after that date, just make sure that you don’t use EIDL funds for payroll. Save those expenses for the PPP loan/grant and you won’t have an issue with that.
But, pay attention to this next part. This could still apply.
How does the PPP loan and EIDL advance work together?
EIDL provides for advances of up to $10,000, which is calculated as $1,000 per employee. This advance does not have to be repaid as long as you use it in accordance with the EIDL rules.
If you receive an EIDL advance and a PPP loan, proceeds from the advance will be deducted from the loan forgiveness amount.
As an example, let’s say your business gets a $25,000 PPP loan (possible grant) and then gets a $5,000 EIDL advance. The amount of the advance is subtracted from the PPP loan. So, the most that can possibly be forgiven is $20,000 ($25,000 – $5,000). The rest of the PPP loan/grant of $5,000 will need to be repaid.