March 31, 2020
The Small Business Act has provided loans to American small businesses for decades. Now, the CARES Act has created a new loan program called the Paycheck Protection Program (PPP) which falls under the Small Business Act. The CARES Act also substantially expands and alters a previously existing SBA loan, the Economic Injury Disaster Loans (EIDL), for a specified period of time. The Coronavirus Aid, Relief and Economic Security Act (CARES Act or the Act) was signed into law by President Trump on March 27, 2020. The Act provides relief loan funding for small businesses and nonprofit organizations due to economic challenges created by the coronavirus (COVID-19). It is important to understand the differences and interplay the Act creates with the PPP and EIDL loan programs.
Paycheck Protection Program (PPP)
The PPP loans created by the CARES Act come under Section 7(a) of the Small Business Act. PPP loan amounts are generally 2.5 times payroll costs incurred during 2019, up to $10 million. The loans are available to small businesses and nonprofit organizations and can be forgiven if certain expenditure, payroll and employee criteria are met. Please refer to our article explaining this loan in detail.
These loans will come through SBA approved banks. Further, the US Treasury in conjunction with the SBA will appoint other institutions, presumably credit unions and other financial organizations, to provide these loans in an effort to meet the demand.
JPS has had conversations with several banks and SBA affiliates in our communities. At this point it is evident that guidance and application information is still needed from the SBA in order to start this application process. Section 1114 of the CARES Act addresses the timing as follows:
Not later than 15 days after the date of enactment of this Act, the Administrator shall issue regulations to carry out this title and amendments made by this title…
This means that guidance should be issued no later than April 10. While we don’t know exactly when the application process will start, from everything we have learned, we expect that lending institutions will be getting information from the SBA before the week is out. Until then, businesses will have to wait before they can apply for these loans.
It should be noted that any business obtaining a PPP loan will be prohibited, under Section 2301(j) of the Act, to also benefit from the Employee Retention Credit available for those paying benefits under the Families First Coronavirus Response Act. Such businesses will also not be eligible for the deferral of payroll tax remittances as provided under the CARES Act. It is important that business owners understand which program or programs under the Act will be most beneficial to their business. We will be providing information in a following article on how these credits can work for a business.
Economic Injury Disaster Loans (EIDL)
The CARES Act also contains amendments to the existing SBA EIDL loans. These loans are under Section 7(b) of the Small Business Act. EIDL loans provide interest rates of 3.75% for businesses and 2.75% for nonprofit organizations. The amount of a loan can be up to $2 million. Further, these loans can have a term of up to 30 years. The interest rate and terms are determined on a case by case basis. The Act amended the existing EIDL loans in the following areas:
- These loans are available through December 31, 2020 unlike the PPP loans which are available through June 30, 2020;
- Changed the term “eligible entity” to be businesses with not more than 500 employees;
- Eliminated personal guarantees on loans up to $200,000;
- Waived the requirement that an applicant be in business for the one-year period before the disaster;
- Allows approval of the loan based on credit score without requiring submission of tax returns;
- Provides for a $10,000 advance for any EIDL loan approved applicant to be disbursed within three days of completing the application. This advance does not have to be repaid.
Applying for both EIDL and PPP loans
The Act allows a business that may already be applying for an EIDL under Section 7(b) to also apply for a PPP loan under Section 7(a) if it will not duplicate the applicant’s use of the EIDL loan. In other words, the proceeds from the PPP loan cannot be used for the same expenses as the proceeds of an EIDL loan.
The purposes for which a PPP loan may be used are similar to those of which an EIDL loan may be used. The EIDL loan may also be used for meeting increased costs to obtain materials unavailable from the original source due to the interrupted supply chain.
Also, the EIDL loan can be refinanced into the PPP loan.
To read other COVID-related JPS articles, Click Here.
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Johnson Price Sprinkle PA is a 60+ year old accounting firm providing small to middle market businesses with tax, business consulting, audit, and technology solution services. With offices in Asheville, Boone, and Marion, NC, our CPAs and JPS team strive to provide personal service alongside technical expertise resulting in our clients’ long-term financial success. We also invest time and energy in our community, taking pride in doing what we can to make Western North Carolina a better place. JPS Mission: To Be Greater by positively impacting our Clients, People, Community and Profession.