New SBA Loan Options: Paycheck Protection Program and Economic Injury Disaster Loans

March 31, 2020

The Coronavirus Aid, Relief, and Economic Stability Act (CARES Act) contains a substantial amount of law changes, including changes to Small Business Administration (SBA) lending programs. Enhancements to existing SBA loan programs include forgivable loans administered through the new Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDLs). Eligible businesses and non-profits may apply for loans under either or both programs.

PPP Summary

The PPP is an extension of the SBA Section 7(a) program. Any small business (generally a business with less than 500 employees) can apply for loans up to the lesser of 2.5x their average monthly payroll costs or $10 million. Loan proceeds must be used to pay for payroll costs, mortgage interest, rent or utilities and are made on a non-recourse basis with no personal guarantees. The interest rate is capped at 4% and the repayment term is for a period of up to 10 years. Payments may be deferred for one year. Businesses are also eligible for tax-free forgiveness of some or all of the principal amount borrowed if the loan proceeds are used for qualifying expenditures during the eight-week period following the loan funding date. However, businesses that receive loans and later cut back on workforce levels or gross payroll after February 15, 2020 are only eligible for limited forgiveness (pursuant to certain formulas) unless they restore their current workforce levels and gross payroll to pre-COVID-19 emergency amounts by June 30, 2020.

EIDL Summary

The existing SBA EIDL program has been liberalized. More small businesses may apply for loans of up to $2 million, depending on economic damages and the ability to repay. The interest rate is capped at 4% and the repayment term is for a period of up to 30 years. Small (less than $200K) loans are also available without the need for personal guarantees, and applicants are eligible to receive advances requiring no repayment of up to $10K. While EIDL loans are not subject to forgiveness, they do present an additional potential source of funds for businesses that are struggling through the current crisis, and loan proceeds (other than advances) may be used for expenses other than payroll, interest, rent or utilities.

Comparison of SBA Business Loan Program to Economic Injury Disaster Loan Program

Loan Type

SBA Business Loan

Economic Injury Disaster Loan

 Maximum Loan Amount

 Lesser of $10M or 2.5X average monthly payroll costs

 Up to $2M, dependent on the applicant’s demonstrated economic injury and ability to repay

 Use of Proceeds

 Restricted to certain payroll, rent, interest and utility costs

 Unrestricted, although “advances” are subject to limits

 Eligible for Forgiveness




 Personal Guarantee Required?


 No for loans up to $200,000, otherwise yes.


 No, unless proceeds used for the non-permitted purpose


 Interest Rate

 Up to 4%

 Up to 4%



Up to 10 Years

 Up to 30 Years

Currently, only applications for EIDL loans are available through the SBA’s website or by mail. Paycheck Protection Program loan application guidance is expected soon for both borrowers and third-party lenders. Before making any decisions, interested borrowers should understand the scope and purpose of these loans.

Below are more details relating to both the PPP and EIDL loans.


Eligible Loan Recipients

Eligible loan recipients include businesses, self-employed individuals, independent contractors or non-profits who employ no more than 500 employees (includes full-time, part-time or “other” basis) or for those businesses that comply with the SBA Small Business Size Standard for the NAICS code in which the business operates.

For businesses with a NAICS code that begins with 72 (accommodation and food services, such as hotels and restaurants), the 500-employee limitation is measured on a per-location basis.  For example, a hotel chain that has 1,000 employees who are spread out over 10 locations with no more than 500 employees at any one location may participate in the program.  Also, the affiliation rules that would otherwise require commonly controlled businesses to combine the number of employees are waived for these businesses as well as any franchise that is assigned a franchise identifier code.

Maximum Loan Amount

The maximum loan amount is the lesser of 2.5X the enterprise’s average monthly “payroll costs” incurred during the previous 12 months before the date the loan is made, or $10 million.

Permitted Uses of Loan Proceeds

The PPP imposes restrictions on the use of loan proceeds. Loan proceeds may be used for the following purposes:

  • Payroll costs
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums
  • Employee salaries, commissions or similar compensations
  • Payments of interest (not including pre-payment penalties) on any mortgage obligation
  • Rent
  • Utilities
  • Interest on any other debt obligations that were incurred before the one-year period beginning with the loan date

Payroll Costs

Identifying payroll costs will help borrowers calculate loan amounts, evaluate permitted uses and ultimately determine how much of the PPP loan will be forgiven.

Payroll costs include:

  • Salaries, wages, commissions and similar compensation
  • Cash tips or equivalents
  • Vacation, parental, family, medical or sick leave
  • Severance pay
  • Group health care benefits
  • Retirement benefits
  • State or local taxes assessed on the compensation of employees (e.g., state unemployment and other payroll-based taxes)
  • Payments of any compensation to a self-employed individual that are considered earnings from self-employment and do not exceed $100,000

Payroll costs do not include:

  • Compensation of an individual employee in excess of an annual salary of $100,000, as pro-rated for the one-year period up to the loan date
  • Federal payroll taxes (FICA, Medicare, FUTA)
  • Compensation of any employee whose principal residence is outside of the United States
  • Qualified sick and/or family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

Non-Recourse Nature of Loans

Loans made under the program are non-recourse against any shareholder, partner or member of an eligible recipient unless loan proceeds were used for a non-permitted purpose. No owner of a borrower is required to personally guarantee any covered loan, nor is any collateral required.

Borrower Certification Requirements

Eligible borrowers must certify that:

  • The uncertain current economic conditions make necessary the loan request to support the ongoing operations of the eligible recipient
  • The loan proceeds will be used to retain workers for the permitted purposes described above
  • The applicant does not have another pending loan application for the same purpose
  • The applicant has not received a duplicative loan from the SBA for the period February 15 through December 31

Interest Rate and Maturity Date

The interest on a PPP loan cannot exceed 4% and the amount that is not forgiven has a maximum maturity of 10 years from the application date.

Deferment of Payments and Prepayment Penalties

The payment of principal (if required) and interest is deferred for up to one year and prepayments may be made without penalty.

Loan Forgiveness

The principal amount of the loans made under the PPP is eligible for forgiveness. Amounts eligible for forgiveness are the lesser of the amount of 1) the loan principal amount or 2) the amounts expended during the eight-week period following the funding that was used for:

  • Payroll costs
  • Payment of interest (other than prepayment penalties) on any recourse mortgage secured by real property owned by the borrower prior to February 15, 2020
  • Rent on a lease obligation of the borrower that was in force prior to February 15, 2020
  • Utility payments (including electricity, gas, water, telephone, transportation or internet access) for which service began prior to February 15, 2020

Loan Forgiveness Reductions

To encourage borrowers to retain and rehire employees, the amount eligible for forgiveness is reduced (not increased) based on workforce or employee salary reductions.

Workforce reductions - The loan forgiveness reduction based on workforce reductions is calculated by taking the amount eligible for forgiveness and multiplying it by the average number of full-time equivalent employees (FTEs) per month employed during the eight-week period beginning with the loan funding date over one of the following:

  • the average number of FTEs employed per month from February 15, 2019 through June 15, 2019; or,
  • the average number of FTEs employed per month from January 1, 2020 and ending on February 29, 2020.

Example:  ABC Inc. employed a workforce of 50 FTEs during the period February 15, 2019 through June 15, 2019, and 45 employees for the period January 1, 2020 through February 29, 2020.  ABC applies for and receives a PPP loan of $1 million which is funded on April 15, 2020.  For the eight-week period April 15, 2020 through June 9, 2020, ABC’s monthly average number of FTEs is 40.  For purposes of calculating the reduction in loan forgiveness, ABC should elect the measurement period January 1, 2020–February 29, 2020, since it will result in a higher amount of the loan being forgiven. In this case $888,889 would be forgiven (1,000,000 – (1,000,000 x 40/45) = 888,889). If ABC Inc. uses the default measurement period of February 15, 2019–June 15, 2019, the amount of the loan forgiven would be $800,000 (1,000,000 – (1,000,000 x 40/50) =$800,000).

Salary or wage reductions - The amount of the loan eligible for forgiveness is also reduced by the total reduction in salary or wages of any employee who earned less than $100,000 (as annualized) during 2019. The amount ineligible for forgiveness is the compensation that exceeds 25% of the total salaries or wages of the employee for the most recent full quarter during which the employee was employed before the eight-week period beginning on the loan funding date.

Example:  ABC, Inc. applies for and receives a PPP loan of $1 million on April 15, 2020.  Jane worked for ABC for all of 2019 and earned a salary of $50,000.  On March 17, 2020, Jane was laid off from her job with ABC due to lack of work. For the period January 1, 2020–March 31, 2020, Jane earned $10,400.  ABC does not rehire Jane. Because Jane was not paid during the eight-week period following the loan funding date (April 15, 2020–June 9, 2020), ABC is not eligible for loan forgiveness for 75% of Jane’s wages for the quarter ended March 31, 2020, or $7,800.

Relief from Forgiveness Reduction

Employers who rehire employees or restore wage reductions of employees by June 30, 2020 may receive relief from loan forgiveness reductions. Loan forgiveness reductions will not apply to any employer who between February 15, 2020 and 30 days after enactment of the CARES Act:

  • reduced the number of FTEs during the period and not later than June 30, 2020 has eliminated the reduction in FTEs; or
  • reduced salaries and wages for one or more employees during the period and eliminated the reduction in salary of the employee(s).

Example: Between February 15, 2020 and April 27, 2020 (30 days after enactment of the CARES Act), XYZ Manufacturing laid off 200 of its 210 workers. The company applied for and received a PPP loan of $6.5 million on May 15, 2020.  From May 15, 2020 through June 30, 2020, XYZ hires 200 employees and has at least the same number of FTEs that it had during the period February 15, 2019–June 30, 2019 (or, at the company’s election, January 1, 2020-February 29, 2020). So long as XYZ uses the loan proceeds for its qualified purposes, XYZ will be eligible for forgiveness reduction relief. 

Federal Income Tax Treatment of Loan Forgiveness

Unless an exception exists, the forgiveness of indebtedness typically results in taxable income, a reduction in tax attributes or both. PPP loans forgiven under this program, to the extent that loan forgiveness would otherwise be includible in the gross income of the recipient, are excluded from income.


Eligibility Requirements

Eligibility for the SBA’s existing Economic Injury Disaster Loan (EIDL) program has been expanded to include businesses and non-profits with no more than 500 employees, sole proprietorships (with or without employees) and independent contractors. All states and their political subdivisions qualify as disaster areas with sufficient economic damage to qualify for EIDLs. 

Maximum Loan Amount

Applicants who demonstrate economic injury and the ability to repay may receive an EIDL for up to $2 million.

Permissible Uses

Other than EIDL $10,000 advances, the use of the loan proceeds is unrestricted.  

EIDL advances of up to $10,000 will be processed within three days of applying. These advances do not have to be repaid, even if the applicant’s loan is denied.  However, advanced amounts must be used for any or all of the following purposes:

  • Providing sick leave to employees not able to work due to the direct effects of COVID-19
  • Maintaining payroll during business disruptions and slowdowns
  • Meeting increased supply chain costs
  • Making rent or mortgage payments
  • Repaying debts that cannot otherwise be paid due to lost revenue

Loan Terms 

The borrower may receive up to $2 million, dependent on the borrower’s demonstrated economic injury and ability to repay. The interest rate is no more than 4% and a loan term of no more than 30 years. Personal guarantees are required unless there is an EIDL advance or for loans of $200,000 or less. Lenders may accept applicants based solely on credit scores or “alternative appropriate methods to determine an applicant’s ability to pay.”


The expanded EIDL program waives the “1 year in business prior to the disaster requirement” for businesses in operation prior to February 1, 2020 and the requirement that the applicant be unable to find credit elsewhere.

Our on-demand webinar on the Paycheck Protection Program can be viewed in our Pandemic Resource Center, which also includes additional updates and guidance on the coronavirus (COVID-19). If you have any questions, please feel free to contact your Marks Paneth tax advisor.

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