The U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury recently addressed a handful of frequently asked questions (FAQs) concerning the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) Program. These programs have been lifelines for many businesses whose operations have been affected by the coronavirus pandemic, and only when answers like these are provided can we fully understand how to use these programs effectively.
Quick Overview of the PPP and the EIDL Program
While the EIDL Program has been around for some time, Congress enacted the PPP as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law in March. Both programs provide businesses with no-cost or low-cost loans subsidized by the federal government.
The PPP provides businesses with up to $10 million in low-interest loans to cover payroll, rent, utilities, and mortgage interest. PPP loans may be forgiven if recipients use loan proceeds in a qualified manner. Initial program funds were depleted in only two weeks, and the second infusion of funds kept the program alive until the SBA stopped accepting applications on August 8, 2020.
The EIDL Program provides businesses with low-interest, long-term, fixed-rate loans during government-declared emergencies. When the coronavirus pandemic was declared a national emergency, EIDL Program loans became available to many businesses. The SBA is still accepting applications.
Several New FAQs
One of the questions recently addressed by the SBA and the Treasury can be found on the PPP Loan’s final FAQ document, question 51.
FAQ #51: Do payments required for the provision of group health care benefits, including insurance premiums, include vision and dental benefits?
Translation: The PPP’s stated purpose is to encourage business owners to retain employees, which is why the loans can be forgiven if employment remains steady. If businesses lay off some of their employees, reduce employees’ working hours, or reduce employees’ pay, the loan forgiveness will be reduced by a comparable percentage decrease in payroll costs. To calculate the amount of payroll that was retained, businesses should include both obvious sources of payroll costs — like salaries, wages, and tips — and less obvious sources of payroll costs, like covered healthcare benefits for employees. The question asks whether vision and dental benefit premiums will count toward forgivable payroll costs.
Answer: Yes, vision and dental benefits are added to other payroll costs.
Three additional questions that were addressed by the SBA and the Treasury can be found in a different FAQ document, as questions 1, 2, and 3 under the heading “Economic Injury Disaster Loan (EIDL) FAQs.”
Translation: When the EIDL Program was expanded to help cover pandemic-related needs, it offered applicants up to $10,000 in quick cash as they waited for their loan applications to be processed. These loan advances were automatically forgiven, but the catch was that they would reduce the amount that could be forgiven under the PPP. When the SBA sends PPP forgiveness amounts to the lender, the lender is tasked with distributing those funds to the PPP applicants. The question asks how the lender will know EIDL loan advance amounts so that they know exactly how much to distribute to the borrower.
Answer: On the PPP Forgiveness Platform, the lender will be able to see the borrower’s EIDL advance.
FAQ #2: How should a lender handle any remaining balance due on a PPP loan after SBA remits the forgiveness amount to the lender?
Translation: Not all PPP loans will be forgiven. Businesses whose payroll costs dropped and businesses that accepted EIDL advances will lose at least some PPP loan forgiveness. The question asks what lenders should do with the remaining PPP loan balances that have not been (and will never be) forgiven.
Answer: The lender should continue to service the loan until the borrower pays it back. Most PPP loans mature in two to five years. The lender is responsible for notifying the borrower of what their payback amount is, which also means that the lender is responsible for notifying the borrower of how much their PPP forgiveness amount had been reduced by EIDL advances.
FAQ #3: What should a lender do if a borrower received an EIDL advance in excess of the amount of its PPP loan?
Translation: As we learned, a borrower’s EIDL advance reduces the amount of their PPP loan forgiveness. So if a borrower’s EIDL advance exceeds the amount of its PPP loan, the entirety of the PPP loan must be paid back. The question asks what the lender should do if this happens to one of their borrowers.
Answer: The lender is required to notify the borrower of how their EIDL advances affected their PPP loan forgiveness. Part of this notification process should be informing the borrower when their first loan repayment is due and when full payment is expected. As those payments come due, the lender must continue to service the loan.
On August 24, 2020, the Treasury released an Interim Final Rule that addressed how rent payments between related parties should be treated when calculating PPP loan forgiveness. Under Section III of the document, titled Paycheck Protection Program – Treatment of Owners and Forgiveness of Certain Nonpayroll Costs, subsection 2.b. poses the following question.
Section III, Subsection 2.b.: Are rent payments to a related party eligible for loan forgiveness?
Translation: For PPP loans to be forgiven, recipients must use program funds to pay for payroll, rent, utilities, and/or mortgage interest. The question asks whether rent payments made to a related party count as eligible expenses when determining PPP forgiveness. For purposes of this question, parties will be considered related if they have any ownership in common.
Answer: Yes, related party rent payments are eligible for forgiveness, but only if two things are true: (1) the amount of loan forgiveness attributable to the related party rent payments does not exceed the amount of mortgage interest that the related party owes on the property during that period, and (2) both the rental agreement and the related party’s mortgage were entered into prior to February 15, 2020.
Although not explicitly posed as a question in the interim document, the Treasury also answers the following:
Implied Question in Section III, Subsection 2.b.: Are mortgage interest payments to a related party eligible for loan forgiveness?
Translation: Related party rent payments are eligible for loan forgiveness, so one might assume that mortgage interest payments made to a related party are also eligible.
Answer: No, related party mortgage interest payments are not eligible for PPP forgiveness. Under most circumstances, businesses paying mortgage interest to a related party are doing so because their businesses were structured in such a way to separate the liability of building ownership from the liabilities of the business’s operations. The PPP loan is not intended to help business owners cover their own costs; it is intended to help business owners cover costs that they owe to third parties.
Additional Answers Likely Forthcoming
The demand for authoritative answers on the PPP and the EIDL Program is only increasing. For instance, after hearing comments from the public, the SBA released information about how borrowers can appeal a decision concerning their loan forgiveness under the PPP. The SBA and the Treasury are likely to release more information about these loan programs in the future, and we will keep you abreast of the important information. Please reach out if you have any questions about your PPP or EIDL loans.