When it comes to Economic Injury Disaster (EIDL) loans and grants, and Paycheck Protection Program (PPP) loans, business owners have questions. Lots of questions. At Nav, we’ve received thousands of them via our COVID-19 Resource Center blog articles, SBA CARES Act Insights Hub on Facebook and through our Lending Specialists who are helping small business owners explore financing options.
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Treasury and the SBA have been slow in providing guidance for some key questions. And some remain unanswered still. But business owners can’t wait as missteps— even if they stem from lack of guidance— could prove costly.
Here are 7 pressing questions small business owners need answered ASAP:
1. What Is the Status of EIDL Applications?
Congress recently authorized an additional $60 billion in funding for Economic Injury Disaster Loans (EIDL), with $10 billion allocated for the grant/advance and $50 billion for loans, to catch up with the backlog of applications.
But business owners who have applied for Economic Injury Disaster Loans and need that funding to pay essential bills are in the dark about the status of their applications.
“Just spoke with a (SBA) representative by phone (1-800-659-2955) and was told that there is no possible way to check my current status of the EIDL Emergency Advance grant. I guess my only option is to wait and see what happens.”
As part of EIDL, the CARES Act mandated the SBA provide an advance of “not more than $10,000” three days after an EIDL application but that did not occur. Some business owners have begun to receive advances — often weeks after they applied— but these advances come with no information on the status of their loan application. And since the advance has since been limited to $1000 per employee, many businesses are anxiously awaiting loans.
While we’ve seen numerous updates from the SBA on PPP loans processed, the SBA doesn’t appear to have been as transparent about EIDLs. How deep is the backlog? How long is funding taking on average between application and the advance/grant, and then the loan? If the program is administered first-come, first-served could disclosing funding by application number help business owners see where they are in line?
Some business owners are barely hanging on with no idea how long it will take to get essential funding. They deserve at least some level of transparency.
2. How Do PPP and EIDL Work Together?
Many business owners have been encouraged by the SBA and Small Business Development Centers (SBDCs) to apply for both EIDL and PPP if eligible. But what’s not clear is exactly how those programs work in concert with each other.
“We received both PPP and an EIDL advance. The PPP must be used within 8 weeks to be forgivable. Can I use the PPP to cover payroll these next 8 weeks, and then use the EIDL advance after that until it runs out, understanding that I’ll need to repay the $10K “overlap” in the future?”
The CARES Act states:
“Section 1102 (a)(2)(3) (Q) “DUPLICATION.—Nothing in this paragraph shall prohibit a recipient of an economic injury disaster loan made under subsection (b)(2) during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available that is for a purpose other than paying payroll costs and other obligations described in subparagraph (F) from receiving assistance under this paragraph.”
What about other time periods? Could a business owner use EIDL funds to cover payroll before and after the 8 weeks of payroll after it gets the loan (the time period associated with forgiveness) as long as it doesn’t fall in that window? For businesses who need payroll help for longer than 8 weeks it’s a valid question. It’s particularly important for self-employed individuals who may not have significant working capital needs outside of payroll.
3. Does an EIDL Grant Prevent an Employer from Taking The Payroll Tax Credit?
The CARES Act creates an employee retention payroll tax credit. Employers whose operations were fully or partially suspended due to government orders, or who experienced a major decline in receipts may be eligible for a employee retention tax credit against Social Security wages for up to 50% of $10,000 in qualified wages (including health plan expenses) paid after March 12, 2020 and before January 1, 2021.
“Also, can I do BOTH the $10,000 grant for EIDL and also the 50% Payroll Tax Credit? I know you can’t do both PPP and the tax credit, but not sure on doing both EIDL $10k grant and also 50% payroll tax credit. Because if I can do both of those, that’s $5k free money for the Payroll Tax Credit and $10k free money for the EIDL grant, and that would be $15k free money if I can do both.”
The IRS is clear that you can’t get PPP and take the employee retention tax credit. But what about the EIDL grant? It’s not clear. Presumably those funds could be used for non payroll tax purposes and therefore not jeopardize the ability to get both. But until Treasury, the SBA or the IRS comes out with guidance, who knows for sure?
4. Why Are EIDL Grants Being Turned Down Due to Credit?
The EIDL is a low-interest loan that business owners can use to help meet working capital needs while they recover from a disaster. These loans are ultimately funded by taxpayers, though, and the SBA requires acceptable credit to qualify.
The CARES Act also created an EIDL advance (or “grant”) of “no more than $10,000” that does not have to be repaid. Section 1110 of the Act states:
An applicant shall not be required to repay any amounts of an advance provided under this subsection, even if subsequently denied a loan.
Business owners—and we—were shocked when applicants were denied the grant due to their credit. If the grant doesn’t have to be repaid why would credit be a factor?
“The EIDL loan was declined and I never received the $1,000 grant either. The rejection letter said that my credit score was too low to get approved for the loan. It’s not really bad credit but more like lack of credit I am guessing. I have no credit cards or loans. Car is paid cash and house is rented. I am liquid everything because I don’t like having debt.”
I have lost some business from the shutdown and expect I will probably lose more soon.
An explanation on why grants are being declined due to credit is needed.
5. Are EIDL Grants Taxable?
The CARES Act clearly states that forgiven PPP loans don’t have to be included in gross income for tax purposes. In Section 1102 it states: “Taxability.—For purposes of the Internal Revenue Code of 1986, any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness described in subsection (b) shall be excluded from gross income.”
But what about the EIDL grants? This reader isn’t the only one who has asked us that question:
Are EIDL GRANTS taxable?
IRS guidance dating back to April 2013 would seem to indicate they are:
Q: If a taxpayer secures a low-interest disaster loan from the Small Business Administration what effect will it have on calculating a casualty loss?
A: A low-interest disaster loan from the Small Business Administration loan must be repaid and therefore does not reduce the casualty loss amount. However, amounts of the loan, if any, which are cancelled or forgiven are included in gross income in the year of cancellation. Additionally, insurance or other reimbursements received and not required to be repaid will reduce the casualty loss.
Is that the intent of Congress in this case? Taxpayers need to know before the quarterly tax payment they must calculate after they get the grant becomes due.
6. How Do the Rehiring Provisions for PPP Work?
The main appeal of PPP is the ability to obtain forgiveness of the loan if used for the proper purposes. However, we’ve discussed the fact that forgiveness provisions are confusing and appear to be contradictory.
“We had a forced closure, so laid off everyone, and most are now receiving unemployment insurance payments plus the federal supplement of $600. One of our employees was on leave at the time and can’t return because of family need, and now, travel restrictions. Must we re-hire her when we receive our loan (which is about to happen)? Our payroll calculations for the loan included her payroll information. Are we allowed NOT to count an employee? We want her back, but we don’t know when she can return and we don’t want to cut her off from unemployment insurance either. Re-hire and then, if necessary, lay off again? Another employee, a part-timer, prefers to retain her unemployment insurance payment until we re-open. Can we also allow that without risking loan forgiveness?”
The CARES Act appears to state that if, during the period of February 15, 2020 and April 26, 2020 (30 days after the CARES Act became law) the business reduces the number of full-time equivalent employees or salaries or wages as compared to February 15, 2020 and then eliminates the reduction by June 30, 2020 then there is an exemption to the reduction. But it’s unclear how that works in conjunction with the other requirements that seem to indicate forgiveness is based on how funds are spent the eight weeks after loan proceeds are disbursed.
Plus all those other questions about employees who can’t or won’t come back to work.
7. Can You Collect Unemployment Before or After PPP?
Self employed individuals may be eligible for Pandemic Unemployment Assistance. They may also apply for PPP. But can they apply for both? And how do the two work together?
“I am self-employed with an S Corp. I have 2 employees. I have been waiting for a PPP loan to get approved and it still hasn’t. Am I able to collect unemployment until my loan is granted? I have read that we are unable to file for both unemployment and a PPP loan. My fear is that I won’t see any money from PPP and lose out on potential unemployment benefits. I pay myself annually $96,000. We have been shut down since March 19 and I’m unable to collect any money from my business or government.”
The Interim Final Rule published in the Federal Register, Vol. 85, No. 76, Monday, April 20, 2020 states:
In addition, you should be aware that participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle
A of the CARES Act, or CARES Act Employee Retention Credits.”
But that’s the extent of this ominous warning. No specific guidance is given as to exactly how it may affect eligibility. What if a borrower decides to pursue the following strategy? Is that permitted?
“My business only got $6,300 in funds. I’m the owner and the only employee on payroll. My business it’s been close for the last 2 months so I’m collecting unemployment. I owe rent and utilities which total close to the 6k. Can I use those funds to pay rent and utilities only ? I know I will have to pay it back but I just want to make sure I won’t have any problem if I don’t use the funds for payroll.”
The intention of these programs is to try to help business owners survive this crisis and resume their businesses successfully. It shouldn’t create more confusion and chaos. They shouldn’t have to hire lawyers to figure this out. (Many lawyers won’t advise on these questions without further guidance anyway.)
If we really support small business owners as we say we do, then let’s get them answers to these and other important questions about COVID relief loans so they can get back to business.