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I got PPP money and EIDL money… now what?!

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When the pandemic hit, many nervous business owners applied for everything that they could to keep their businesses afloat. Now they are seeing random amounts of money being deposited in their bank account and don’t know what to do.

Economic Injury Disaster Loan (EIDL): EIDL Loan vs the EIDL Grant 

There are two of them?

  • EIDL Loan – this is a normal loan applied for directly from the Small Business Administration (SBA). This has normal loan requirements, under-writing, and credit checks.Generally, the loan term is 30 years with 3.75% interest and payments are deferred for 12 months.
  • EIDL Grant – as part of the EIDL loan application, you could check a box that says “send me free money” (okay, it actually says “I want to receive an advance on my loan”). When you check that box you get an advance on your loan (we will call it the ‘grant’ hereafter). The grant gets deposited in your account with no notice and is a round number (like $1000 or $8000). The grant does not have to be repaid. Even if you do not get approved for the EIDL loan, you still get to keep the EIDL grant.

I got the grant.. you are telling me I might get more money?

Many people applied for the EIDL loan, got $1000 in their bank account and thought it was all done. Then a month later, the SBA does a credit check and they can’t figure out why. This is because they applied for the loan and checked the box to get the “free money”. The free money came (i.e. the grant) and now the SBA is getting around to processing your loan application (i.e. the loan). So, you should be contacted soon by the SBA giving you even more money. If you accept the loan, there are conditions on what you can spend the EIDL money on and you will have to pay it back with interest.

Paycheck Protection Program (PPP)

The PPP is a different loan through the SBA that applied for through a third-party (Banks, QuickBooks, PayPal, Kabbage, etc). The PPP loan amount is based on the company’s payroll (or 2019 net income for sole proprietors). The PPP loan can be forgiven if you spend the money on the right things over the 8-week period after you received the PPP money. If some of the PPP is not forgiven, the terms of the PPP loan are 2 years with 1% interest and payments deferred for 6 months.

[UPDATE: 05/21/2020 13:37 Pacific Time – it has just been announced that the House will vote on the Paycheck Protection Flexibility Act which would extend the 8-week forgiveness period and eliminate forgiveness restrictions limiting non-payroll expenses to 25% of loan proceeds among many other beneficial changes. So, don’t rush around to meet the current PPP requirements because it could all be different next week.]

Interplay of the PPP and the EIDL Grant and the EIDL Loan

The amount of the PPP you can have forgiven is reduced by the amount of your EIDL grant. Note: the SBA does not do this automatically. So, you will get the full amount of your PPP loan and the full amount of your EIDL grant.

E.g. if you receive $12,000 from PPP and $1000 grant from the EIDL, the max PPP you can have forgiven is $11,000 and $1000 will have to be paid back under the terms of the PPP.

You can get PPP, EIDL grant, and EIDL loan but the money has to be spent on different things. No double-dipping. The PPP must be spent on payroll, business mortgage interest, business rent, and utilities. The EIDL is meant to provide working capital so can be spent on most normal operating bills (payroll, rent, accounts payable, etc) but it cannot be used for ‘extras’ such as bonuses or expansion.

What does all this mean from a tax perspective?

Federal

  • EIDL Loan and PPP loan – loans are not taxable. Interest on the loans is deductible.
  • EIDL Grant – Treat as taxable for now. The CARES Act is silent about whether the EIDL grant is considered income and general tax law says all income is taxable unless Congress says it is not.
  • Forgiven amount of PPP loan – not considered income so not taxable (Section 1102 CARES Act), however the IRS says you cannot deduct the expenses paid with the forgiven amount of PPP loan so this is a wash and not helpful. (There is draft legislation to fix this so the expenses will be deductible and so you actually get a tax benefit).

California

  • EIDL loan and PPP loan and EIDL grant – CA treats these the same way as the Feds do.
  • Forgiven amount of PPP loan – this IS considered income to California. So, an adjustment will be made on your California return to include the forgiven amount in income but you also get to deduct the expense so it is a wash for CA purposes.

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