This article is based on a ChannelPro webinar conducted by Rayanne Buchianico, owner of ABC Solutions, an accounting, tax, and consulting firm; and business coach and consultant Manuel Palachuk of Manuel Palachuk International.
TO REAP THE FULL BENEFITS of federal loan programs designed to provide relief for small businesses during the coronavirus pandemic, channel pros need to understand how they work. For those who received money from the Paycheck Protection Program (PPP) established by the CARES Act and implemented by the Small Business Administration, understanding the process for forgiveness is key. For those who have received or applied for an Economic Injury Disaster Loan (EIDL) and/or an EIDL Advance, putting those dollars to the best use is critical.
Here are some common questions and answers to help on both fronts.
Q: Who's eligible for PPP forgiveness?
Generally speaking, if you received a PPP loan and you used that money appropriately (e.g., for payroll, payroll taxes, employee benefits, rent, or utilities) and you did not receive any advance on EIDL funds, then potentially the entire PPP loan can be forgiven.
If you did receive an advance on the EIDL (which is no longer available) in addition to PPP money, that advance will get rolled into your PPP loan and that portion is not forgiven. If you did not receive PPP money, the advance does not have to be repaid.
Q: Is PPP loan forgiveness automatic?
No. Businesses must file Form 3508EZ ; if you received less than $50,000 there is a new Form 3508S. Make sure your documentation is complete and accurate. You need to file the application for forgiveness through the bank that lent you the money. The bank will forward your application to the SBA, which will either approve or deny it. The SBA has provided regulations and guidelines on appealing a denial.
Q: What is the difference between EIDL and PPP?
The PPP was intended to help businesses continue to pay their employees through a short period of this pandemic. You have five years to pay off any unforgiven balance at an interest rate of 1%. EIDL is a larger sum of money intended for operating expenses and working capital, and can be used for things like continuation of healthcare benefits, rent, utilities, and fixed debt payments. You have 30 years to pay it back at an interest rate of 3.75%. Payments are deferred for 12 months, but interest accrues. You do not need to have an economic injury in order to qualify for this loan. The deadline to apply is December 21, 2020.
Q: Are there other things EIDL money can be used for?
Accounts payable items like credit card debt, sales tax, payroll taxes, and cost of goods are considered working capital. More broadly, the money can be used to improve your company’s current or future position. This could include furthering your education, paying for marketing efforts, hiring a skilled engineer, or purchasing equipment for a hardware-as-a-service offering.
Q: Is there any forgiveness on an EIDL loan?
Q: If my business goes bankrupt, what am I liable for?
First, consult a lawyer. In bankruptcy, there are certain types of debt that cannot be forgiven, such as student loans, income taxes, and federal debt. The SBA loan technically is considered a federal debt. Corporations and LLCs may not be liable in a case of bankruptcy; sole proprietorships may be liable. In all cases, how you spent the money will be examined. If you did not spend it properly, you could be subject to jail. Second, consult a lawyer.
Q: What’s the first thing I should do when I receive EIDL money?
Make a plan with clear goals: to help your business grow, get your business out of debt, improve your cashflow, etc. Periodically measure results before you spend the whole sum and revise the plan as necessary. You want to make sure you’re on the right track, because that loan money will start to come due before you know it.
ABC Solutions has a free PPP forgiveness worksheet (for Form 3508EZ) that you can find here.