Disaster Loan Forgiveness: How Can Businesses Spend Relief Money?

May 5, 2020
Man calculating disaster loan forgiveness sitting at a table.

Ever since the SBA started taking loan applications due to the coronavirus pandemic, many small business owners focused solely on submitting their applications, which is entirely understandable. 

However, now that loan applications are being approved and money distributed to businesses across the country, another important question should be popping into your mind: how can I make sure this loan is forgivable?

The CARES Act offers several options for potentially-forgivable loans to struggling small businesses. But, of course, there are regulations to who is eligible.

It’s important to start thinking about loan forgiveness the moment you receive your money. That way, you won’t be blindsided later if your loan isn’t eligible for forgiveness.

What Disaster Loan Programs Offer Loan Forgiveness?

There are two disaster loan programs that offer loan forgiveness: the Economic Injury Disaster Loan (EIDL) and the Paycheck Protection Program Loan (PPP). Both loans are designed to benefit business owners. However, their approaches to doing so are different. 

EIDLs are loans sent from the Small Business Administration (SBA). As of April 2020, you can receive up to $1,000 that can pay for immediate costs for your business. 

PPP Loans are disbursed through commercial lenders that work with the SBA. PPP Loans are also forgivable for small business owners under certain circumstances. 

Both loans recently received additional funding from the government in an attempt to help more small businesses. Applications re-opened late in April.

What are the Qualifications for Forgiveness? 

To qualify for loan forgiveness with the EIDL, your business must be a small business – meaning having 500 employees or less. Business owners involved in partnerships, who are self-employed, or who are in sole proprietorships, also qualify for loan forgiveness. To qualify for loan forgiveness with an EIDL loan, ensure that your payroll and emergency costs are covered. 

To qualify for loan forgiveness with the PPP loan, your business must be a non-profit, small business, tribunal business, or Veteran’s organization. You’ll also qualify for the PPP loan if you operate a business as an independent contractor, self-employed, or a sole proprietor. PPP loans must be used to ensure that your business remains open, and your employees keep their benefits, jobs, and wages. You can use PPP loan money to cover: 

  • Payroll costs (capped at $100,000 annually for each employee)
  • Health care benefits (including paid sick or medical leave and insurance premiums)
  • Mortgage interest obligations 
  • Utility payments 
  • Interest on other debt obligations incurred previous to February 15, 2020

If you have questions, talk to an accountant or bookkeeper. They’ll be able to advise you on your specific business expenses to ensure you qualify for forgiveness.

How Can Businesses Apply for Disaster Loan Forgiveness?

To apply for disaster loan forgiveness via the EIDL loan, visit the Small Business Administration’s website. To apply for disaster loan forgiveness via the PPP loan, contact, or visit your financial institution for further information.

What Should I Know About Loan Forgiveness?

Before applying for either loan, it is important to consider the details. Here are the similarities between the two types of loans. You’ll qualify for EIDL and PPP loans if your business has less than 500 employees. If you operate a business as a sole proprietor, you’ll also apply for either an EIDL or PPP. 

EIDLs allow small business owners to borrow up to $2 million at a maximum interest rate of 3.75%. If you borrow less than $200,000, then you are not required to submit personal guarantees. Collateral will be requested by the SBA if your loan exceeds $25,000, but if you can’t provide it, your application won’t be disqualified. 

An important thing to remember is that you’ll need to prove how you used your loan money in order to qualify for forgiveness. That means it’s important to meticulously log your transactions in your books. If you have a bookkeeper, make sure they’re keeping careful track of everything. If you’re doing it yourself, make sure you double-check everything is logged correctly. 

If you’re unsure how to apply for an EIDL or PPP loan – or if you have questions about how you can use the money – speak to an expert. An accountant will be able to provide answers specific to your business, employees, and general situation. Don’t hesitate to seek advice from the experts to guide your business through this global crisis.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.