8559 / What are the paycheck protection loans and economic injury disaster loans for small business owners?
(1) expanded Economic Injury Disaster Loans (EIDLs) and (2) Paycheck Protection Loans.
EIDLs1 were available through the Small Business Administration (SBA), and, even pre-COVID-19, contained favorable terms such as 30-year repayment periods, 3.75 percent interest rates and deferral of the first month’s payments. The relief made it easier to qualify if the business existed as of January 31, 2020. The SBA could grant the loan based on the business’ credit score without a tax return and regardless of past bankruptcies—and the average annual receipts tests did not apply. For loans of less than $200,000, no personal guarantee or real estate collateral was required.
Paycheck protection loans (PPP loans)2 were available to employers with fewer than 500 employees that were in operation before February 15, 2020. These loans maxed out at (a) $10 million or (b) 2.5 times the employer’s average monthly payroll costs during the one-year period ending the date the loan was made. Loan terms for amounts not forgiven included: interest rates of up to 4 percent, 10-year repayment terms, payment deferrals for six to 12 months and waiver of personal guarantee and collateral requirements.
Under the CARES Act, part of the paycheck protection loan could be forgiven when used during the eight weeks following the loan origination date for operating costs like payroll costs, rent, mortgage interest, interest on outstanding debt, utilities, employee retirement benefits and health insurance costs. The Paycheck Protection Program Flexibility Act (PPPFA) extended the eight-week period to 24 weeks from the date the lender made the first loan payment to the small business owner.
Planning Point: Under the Consolidated Appropriations Act of 2021, all borrowers can choose the length of their own covered period. Borrowers were entitled to choose a covered period that is as short as eight weeks or as long as 24 weeks. The clock started to run on the date the second draw loan proceeds were disbursed.
Compensation that exceeded $100,000 per employee, as pro-rated for the period, was excluded from the definition of payroll costs. See Q . Loan forgiveness did require the employer to maintain the same average number of employees during the first eight-weeks of the loan, based on the eight-week period spanning from February 15, 2019 to June 30, 2019 or January 1, 2020 to February 15, 2020 (loan forgiveness was pro-rated, not entirely eliminated, for employers who reduced staffing). Reducing compensation for employees earning under $100,000 by more than 25 percent could also reduce the amount forgiven. The PPPFA gave employers until December 31, 2020 to bring workers back to work/restore wage levels to continue to qualify for loan forgiveness (extended from an earlier June 30, 2020 deadline).