The CARES Act: The Basics of EIDL and PPP Loans

The CARES Act — a collection of pandemic-related provisions — has good news for small businesses struggling to stay afloat during the COVID-19 pandemic: The act provides relief to U.S.-based businesses with (1) 500 or fewer employees that are unable to pay their bills because of the coronavirus pandemic or (2) the standard number of employees established by the administration for the industry in which the entity operates. Sole proprietors, independent contractors and eligible self-employed individuals may be eligible for loans under the act.

Eligible businesses applying for loans or grants under the provisions of the act must meet certain criteria, including certification that the loan will be used to (1) retain workers, (2) maintain payroll or (3) make mortgage interest, lease or utility payments. All applicants must certify that they don't have any other applications pending under this program for the same purpose. However, some of the SBA's usual requirements, such as those regarding collateral and personal guarantees, will be waived.

The maximum loan amount is capped at $10 million for all applicants. For businesses that were in existence during the past year, the formula is 2.5 times the average total monthly payroll costs incurred in the one-year period before the loan is made. There are additional details, including special rules accommodations for seasonal businesses and startups.

The government offers several other provisions specifically geared toward helping businesses succeed during this national emergency:

• Loan payments may be deferred for between six months and one year.
• Subject to upcoming regulations, loan proceeds used for allowable purposes  may be forgiven. Companies will have to meet certain standards of retaining employees, for example.
• Any principal amounts that are forgiven under the act and its forthcoming regulations are excluded from the borrower's taxable income.

Because the situation is so critical, the SBA will work as quickly as possible to disburse funds. The agency's goal is to make a decision on eligibility within two to three weeks and make an initial disbursement of $25,000 within five days after approving a loan. The rest of the loan will be disbursed on a schedule set by your business's loan officer.

Keep in mind that this article provides a general overview. Congress acted quickly to pass this 880-page bill, so clarifying regulations surely will be issued. Be sure to consult your tax adviser for more details and specific advice about how the act can help your business before submitting your application.

Finally, note that these provisions are new, so it may take a little while for various government websites to get up to speed with all the details. Also note that the SBA offers multiple loan programs: The already existing Economic Injury Disaster Loans (EIDL) and the new, more flexible Paycheck Protection Program (PPP) loans, which are being rolled out in the coming days--check with a local SBA-approved bank. (All existing SBA-certified lenders will be given delegated authority to speedily process PPP loans.) There are important differences between them, so work with your financial professional to choose the right one for your business.