CARES Act Relief Provision Review – Pt 2: PPP Loan, EIDL Advance, and the Stimulus Check

This article is the second installment of a four part series covering the relief provisions provide under the CARES Act, which was enacted by the federal government in response to the negative economic impact COVID-19 has had on America and its citizens.

Each part of this series will cover relief provisions in the CARES Act and how to take advantage of them by the following topics:

• Part 1: Tax Due Date Relief
• Part 2: PPP Loan, EIDL Advance, and the Stimulus Check
• Part 3: Tax Relief for Businesses, Professionals, Investors, and Individuals Alike
• Part 4: Utilization of Retirement Plan Funds and Extended Contribution Dates

This article covers the PPP Loan, the EIDL Advance and the Stimulus Check. These provisions are probably the most well-known and discussed provision of the CARES Act are those related to the Paycheck Protection Program (i.e. the PPP Loan), Economic Injury Disaster Loan and Advance, and the Recovery Rebate Credit (i.e. the “Stimulus Check”). We will discuss the major provisions and requirements of each of these in this article.

                A. The PPP Loan

The technical term of this program, the Paycheck Protection Program, provides “small businesses” with loans to help pay up to 8-weeks of payroll costs, mortgages, rent and utilities, hence its informal name, the PPP loan. The this program technically gives money to qualifying small businesses in the form of the loan, the amount provided does not have to be paid back to the government up to the amount it is used for payroll costs, mortgage, rent and utility payments incurred between February 15 and June 30 of 2020.

Lenders began accepting applicants giving this loan out to qualifying small businesses in March of 2020. The first tranche of money provided by the government was eaten up very quickly, thus forcing the US government to pass a second tranche of money for which lenders began accepting applicants on April 27, 2020. What is important to note is that qualifying small businesses are able to apply for the PPP loan through June 30, 2020. However, if you have not already applied (today being May 29, 2020), it is not likely you will be entitled to any funding. That is because the PPP loan is doled out on a first come, first serve basis, and funds are limited.

PPP Loan Eligibility.  So what is a “qualifying small business”? It is a business that has 500 or fewer employees. What is important to note that this small business standard needs to have been met from February 15, 2020 through June 30, 2020. If not, the PPP loan does not become forgivable to the business to whom it was provided and will have to be repaid. 

All types of small businesses are eligible for the PPP loan. This includes sole proprietorships only consisting of a single person, self-employed persons through entities such as an C corporation, S corporation, partnerships and LLCs. Theoretically, if you were the sole employee of your business, you could be eligible for the PPP loan so long as you were on your own payroll.

How to Apply. Many banks are eligible to be providers of this loan. The big banks you can think of—Chase, Bank of America, etc.—are all lenders of this loan. The bank or lender had to be approved by the Small Business Administration to be eligible to be a provider. Check with your local bank if you are unsure if they are eligible providers of the PPP loan.

What should be noted is that the loan is generally applies for on SBA Form 2483. However, lenders will require different pieces of information in addition to SBA Form 2483. There is no current uniform standard out there as to what is required to be provided.  

PPP Loan Terms. The size of the PPP loan granted depends on the amount of a businesses average monthly payroll costs. Specifically, the size of the loan is the lesser of (1) 2.5 times the average monthly payroll cost incurred by the borrower during the one-year period before the loan is made; or (2) $10 million.

If the whole PPP loan is not forgiven, because it is not used for payroll, rent, mortgage obligations, or utilities, or the use of the loan’s proceeds does not meet the “25% Requirement” as outlined below, then the borrower is required to accrue and pay interest on the loan at 1.00%, fixed per annum.

A final not for this section is the amount of payroll costs the PPP loan may be used to cover—it can only be used to cover up to $100,000 of payroll costs per employee. It cannot be used to cover more than $100,000 per employee or else such proceeds are at the risk of not being forgiven.

To Qualify for PPP Loan Forgiveness. The entirety of the PPP loan given has the ability to be fully forgiven, however, this depends upon the borrower’s use of the loan’s proceeds. As we’ve mentioned several times through this article, the proceeds of the loan must be used for payroll, rents, utilities, and mortgage obligations. However, in addition to this, at least 75% of the loans proceeds must be used for payroll costs—to state this in the inverse, no more than 25% of the loan’s proceeds can be used for rent, mortgage obligations, and utilities.

Finally, the intent of this loan was to make sure that employers kept employee around in wake of the economic fallout COVID-19 brought. So, to ensure those employers and businesses who were given the PPP loan, a requirement was inserted for PPP loan forgiveness. The amount forgiven on a PPP loan is reduced if an employer reduces their full-time employees or reduces their salaries by mor than 25% whose annual salary is $100,000 or less.

How to Apply for Forgiveness. In order to apply for forgiveness, the borrower will have to apply to their lender servicing their PPP loan. Just as the applications of the PPP loan varied from lender to lender, there is no uniform process to apply forgiveness. However, documentation will need to include the number of full-time employees and their associated payrates during the period of the loan was granted. Additionally, the documentation will require verification of how the loan proceeds were used to show that at least 75% was used for payroll costs, with the remaining 25% to be used for rent, mortgage and utility payments.

Taxability of the PPP Loan. Under general US tax law, loans that are forgiven are usually taxable to the borrower. However, due to the circumstances under which the PPP loan is being provided, the US government included a special provision in the CARES Act that exempt PPP loan forgiveness from taxation.

However, the flip-side of this provision prevents businesses from deducting expenses paid for out of the proceeds of the PPP loan. If this was allowed, it would be providing a double benefit to the PPP loan’s recipient—no taxation on the grant of the loan, and a deduction from the use of the loan. This would result in too much of a tax break to allow.

                B. The EIDL Advance

As an alternative to the PPP loan, or if you don’t qualify for the PPP loan, you are not totally out of luck. The US Government alternatively has been providing what is known as the Economic Injury Disaster Loan Advance (EIDL Advance). This is essentially is an grant up to $10,000 that does not need to eb repaid to the US government.

The EIDL Advance was designed to be applied for in addition to the PPP loan—the EIDL Advance was just that, and advance of money against a PPP loan that would later be granted to an applicant. If an applicant was so lucky to have received the EIDL Advance and the PPP loan, the amount of the EIDL Advance received would be offset against the PPP loan received.

                C. The Recovery Rebate Credit

The Recovery Rebate Credit is provides payments of up to $1,200 per person, plus $5000 for qualifying children deemed to be dependents. This program is widely known as providing “stimulus checks” to US taxpayers.

The total amount paid out on a “stimulus check” depends upon a persons “adjusted gross income” form their 2018 or 2019 tax filing. A person is provided the full $1,200 if their AGI is $75,000 or below. However, once a person’s AGI gets above this $75,000 mark, the amount receive begins to lower. The amount received is phased out once a person’s AGI hits $99,000.

The amount received via a stimulus check are not taxable to their recipient, nor will they increase a person’s 2020 tax liability or decrease their 2020 refund.

Additionally, if you missed the recent round of stimulus check payments, the “stimulus check” can be claimed on a person’s 2020 return, but must be reduced by the amount received on their stimulus check.