PPP and EIDL Repayment Forgiveness
Took a PPP or EIDL loan? Here’s how to repay and receive forgiveness.
The Paycheck Protection Program (PPP) and the SBA’s Economic Injury Disaster Loans (EIDL) can both help your business weather the COVID-19 pandemic. Low interest rates, plus the chance to have some of your loans forgiven, make both the PPP and EIDL attractive options.
Loan forgiveness is not guaranteed, however. And during these trying times, the last thing you need is extra debt weighing down your business.
So, here’s what you can do to increase the chances of having your PPP loans forgiven, what you can expect from EIDL in terms of grants, the best ways to pay off both, and why bookkeeping is essential to the process.
How PPP forgiveness works
Before you start planning how to pay off your PPP loan, try to have as much of the loan amount forgiven as possible.
How to qualify for PPP loan forgiveness
In order to have your PPP loan forgiven, you’ll need to follow certain guidelines:
Expense categories. Your PPP loan can only be used for payroll, mortgage interest, rent, and utilities. For mortgage, rent, and utilities, you need to have signed an agreement for your workspace before February 15, 2020.
24 weeks. Your PPP loan covers up to 24 weeks of expenses, starting on the date you get your first payment from the lender.
The 60/40 rule. At least 60% of your loan amount must be spent on payroll. This doesn’t include contractors. Only 40% can be spent on non-employee expenses.
Staffing requirements. Broadly speaking, you need to have the same number of employees on payroll during the PPP loan period as you did before the pandemic hit in March.
Salary requirements. You must pay at least 75% of the total average salary of each employee in 2019. This requirement is only assessed for salaries over $100,000.
If you’re self-employed, these rules change a bit, since you don’t have payroll. In that case, you can apply to have eight weeks’ worth of your loan forgiven as money spent on your owner’s compensation.
For a more detailed look, check out this complete guide to PPP loan forgiveness.
Document checklist for PPP loan forgiveness
In order to have your PPP loan forgiven, you need to prove you’ve correctly used the loan based on SBA guidelines.
Here’s a list of the documents you’ll need. Be sure to check with your lender before completing your application, however—they may require extra information.
Documents proving the number of full-time employees you have on payroll and their pay rates for the periods used to verify you met the staffing and pay requirements. Those include:
Payroll reports from your payroll service
Payroll tax filings (Form 941)
Income, payroll, and unemployment insurance filings at the state level
Documents that verify any retirement and health insurance contributions
Documents that prove your eligible interest, rent, and utility payments were active in February 2020
Documents to verify your eligible interest, rent, and utility payments (ie. canceled checks, payment receipts, account statements)
When it comes to PPP loan forgiveness, clear bookkeeping is essential. You need to track all of your expenses for the 24 week loan period; typically, your lender will request this information in digital format.
Also, you’ll need complete financial statements at the end of the fiscal year. One of the terms of the PPP loan is that your lender and the SBA have the right to audit your financial records any time. There’s no guarantee you’ll get a PPP audit, but you need to be prepared for the worst case scenario.
How to apply for PPP loan forgiveness
You can apply for loan forgiveness through your lending institution using the PPP forgiveness application form.
How EIDL forgiveness works
EIDL forgiveness works differently than PPP. In effect, EIDL offers two sources of funding: A grant of up to $10,000, plus the loan itself.
When applying for EIDL, you can opt to apply for the grant at the same time. The grant amount is $1,000 per employee, up to a maximum of $10,000.
This is important: Even if your application for EIDL is rejected, you’ll receive the grant money.
The EIDL loan proper is a regular loan, administered through the SBA. However, it has very low interest rates, and a repayment period of up to 30 years.
How to pay off EIDL and PPP
Compared to the funding options available to small businesses before the pandemic, PPP and EIDL offer incredibly low interest rates, plus generous repayment terms.
But a liability is a liability. Even if PPP and EIDL help your business get out of a financial rut, they’re still negative numbers on the books.
Luckily, neither loan program penalizes early repayments. The sooner you can pay them down, the less interest you’ll have to pay. Here’s how to get started.
Make sure you understand the terms of the loans
The PPP and EIDL are each different in how they are administered and repaid, and how they can be used.
This is a broad, surface-level guide to PPP and EIDL. As you begin to plan repayment, make sure to check out an in-depth PPP guide and EIDL guide.
That way, you’ll have a complete understanding of your options for using your loan money, as well as how PPP and EIDL work together.
Start planning payments early
The EIDL lets you wait 12 months before making your first payment. And the PPP doesn’t require payments for the first 10 months.
But that doesn’t mean you should wait the maximum amount of time before you start repaying—or that you should be unprepared when payments begin.
Do your best to create accurate financial projections for your company one year from now, so you can have an idea of how regular loan repayments will impact your business. There’s no point in waiting until the last minute to reorganize your finances.
Then, if you can spare a piece of your cash flow, set up a loan repayment fund. It’s worth the effort even if, at the end of the year, you only have enough for two or three repayments. That fund can act as a buffer during times of financial uncertainty—so you’ll still be able to make loan repayments if you have a slow month.
Reduce non-payroll expenses
With PPP, you need to maintain salaries and staff size during your loan period in order to qualify for forgiveness. And you can only spend 40% of the amount forgiven on non-employee expenses.
Rather than treating your new loan as a chance to loosen your belt and worry less about expenses, treat it as incentive to double down on cutting back.
COVID-19 has created a new economic and social landscape. You may have opportunities you never had before to lower business expenses, such as moving to a fully remote work arrangement, instead of maintaining an office.
Write off your interest payments
Good news! Interest payments on business loans are tax deductible. By taking care to track and write off every interest payment, you can free up resources to repay your loan sooner.
Sole proprietors can write off interest payments on Line 16 of Schedule C.
Partnerships and multi-member LLCs can write them off under “Other Deductions” on Form 1065.
And corporations can file them under “Other Deductions” on Form 1120.
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Remember, PPP and EIDL are good things—even if they do mean you take on more debt. So long as you manage loan repayments and do everything you can to have some of your loans forgiven, you’re on the right track to weathering the roughest part of COVID-19.
Looking for more help planning the future of your small business? Check out Bench to get professional support from America’s largest professional bookkeeping service for small businesses.
Author: Bryce Warnes
Bio: Bryce is a writer for Bench, the online bookkeeping service that pairs you with a team of professional bookkeepers who do your bookkeeping, so you don’t have to.
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