Which COVID-19 Loans Are Forgivable and How To Get Your Loan Forgiven

The Consolidated Appropriations Act (CAA), 2021, signed into law on Dec. 27, 2020, provided money for a new type of Economic Injury Disaster Loan (EIDL) advance and funding for a new grant that targets shuttered venues.

Guidance from the Small Business Administration (SBA) describes how to get part or all of your PPP loan forgiven as well as what you need to do to take advantage of the new EIDL and shuttered venue grant programs.

New Funding for One Old Program and Two New Ones

The SBA now offers three programs struggling businesses can use to obtain forgivable operating funds provided they qualify. Amounts up to $10 million are available, depending on the program, circumstances, and qualifications.

Keep in mind that, with similar limits, previous advances averaged just $3,459 in 2020 and forgivable loans averaged only $100,729. The new programs are designed to offer more relief and target smaller businesses as well as those in low-income areas.

The CAA, 2021 amends the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide full $10,000 advances to qualifying businesses, up to $10 million dollar grants to shuttered venues, and as much as $10 million in first-time PPP loans ($2 million if you are applying for a second loan).

Targeted EIDL Advance

The Targeted EIDL Advance program, which is the most restrictive program authorized under the CAA, makes up to $10,000 available to applicants located in low-income communities who previously received an EIDL Advance for less than $10,000, or those who applied but received no funds due to a lack of available program funding.

If you previously applied for and received a partial EIDL Advance ($1,000–$9,000) under the original, now expired EIDL Advance program, the SBA will reach out to you first by email to determine your eligibility and provide instructions on what documentation you need to submit.

If you previously applied for an EIDL Advance but did not receive one due to a lack of available funds, you are second in line to be contacted by the SBA.

Targeted EIDL Advance: Qualifications

If you are in the first group—those who applied for and received an EIDL Advance of up to $9,000—you may qualify for a Targeted EIDL Advance if you:

• Are located in a low-income community, as defined in section 45D(e) of the Internal Revenue Code; and
• Can demonstrate you suffered a more than 30% reduction in revenue during an eight-week period beginning on March 2, 2020, or later. You will be asked to provide proof of the more-than-30% revenue reduction.

If you are in the second group—someone who applied for an EIDL Advance on or before Dec. 27, 2020, but did not receive one—you must meet the qualifications above plus one more:

• You must have 300 or fewer employees. 

Any business that would normally be eligible for the EIDL program would potentially be eligible, including sole proprietors, independent contractors, and private, nonprofit organizations. Agricultural enterprises are not eligible.

All applicants may be asked to provide an IRS Form 4506-T, which gives the SBA permission to request your tax return information.

The SBA cautions against submitting a duplicate COVID-19 EIDL application. Only prior applicants will be considered for the Targeted EIDL Advance.

Targeted EIDL Advance: Permitted Uses

Your Targeted EIDL Advance will not have to be repaid provided that you use 100% of the money for:

• Paid sick leave
• Maintaining payroll
• Increased costs of materials
• Mortgage, lease, or rent payments
• Other obligations that can’t be met due to revenue loss

Targeted EIDL Advance: Non-permitted Uses

You may not use your EIDL Advance (or loan) for:

• Replacing lost sales or profits
• Business expansion
• Refinancing long-term debt

Consequences of EIDL non-permitted use: If you use all or part of your advance (or loan) for non-permitted uses, it will not be forgiven and may be subject to immediate payback.

Because the EIDL loan and loan advance are considered disaster funds, if the SBA determines you misused the funds, the penalty could be immediate repayment of one-and-a-half times the original loan amount, plus possible criminal charges.

Targeted EIDL Advance: Tax Treatment

Your Targeted EIDL Advance will not be taxable and will not be deducted from any PPP loan forgiveness amount if you receive both an EIDL targeted advance and a PPP loan. If your PPP loan forgiveness amount was previously reduced by an EIDL grant, the CAA directs the SBA to issue rules correcting that situation.

Targeted EIDL Advance: Forgiveness

There is no formal application process for Targeted EIDL Advance forgiveness. When you receive the funds, you are free to use them immediately. The only requirement is that you must spend the advance only for the expenses listed above. Although there is no application or accounting requirement, you should keep a detailed record of how you spend advance funds in the event the SBA has questions at a later date.

Shuttered Venue Operators Grant (SVOG) Program

The Shuttered Venue Operators Grant (SVOG) program was established under the CAA, 2021 as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act and later amended by the American Rescue Plan Act. The program includes $16 billion in grants to shuttered venues, to be administered by the SBA’s Office of Disaster Assistance.

Eligible applicants may qualify for 45% of their gross earned revenue, with a maximum amount available of $10 million per grant, and $2 billion is reserved for eligible applicants with up to 50 full-time employees.

Eligibility for an SVOG

To be eligible to apply for an SVOG, you must be:

• A live venue operator or promoter
• A theatrical producer
• A live performing arts organization operator
• The operator of a relevant museum, zoo, or aquarium that meets specific criteria
• A motion picture theater operator
• A talent representative
• A business entity owned by an eligible entity that also meets eligibility requirements

In addition, you:

• Must have been in operation as of Feb. 29, 2020
• Must not have received a PPP loan on or after Dec. 27, 2020

Getting Ready to Apply

The SBA is working on an online SVOG application platform. Until the platform is up and running, the SBA suggests that interested entities:

• Register under the Data Universal Numbering System (DUNS), which provides a unique nine-digit business identification number.
• Register in the System for Award Management (SAM.gov).
• Gather documents that confirm the number of employees and monthly revenues, floor plans, copies of contracts, and any other information that seems pertinent.

Allowable Use of Funds

SVOG funds may be used for: payroll, rent, utilities, mortgage payments, debt, worker protection, independent contractors, ordinary and necessary expenses, administration, state and local taxes and fees, leases (as of Feb. 15, 2020), insurance, advertising, and production costs

Grant funds may not be used for: buying real estate, making payments on loans originated after Feb. 15, 2020, making investments or loans, making contributions or other payments to, or on behalf of political parties, political committees, or candidates for election, or any other use prohibited by the Administrator

Required Record Keeping

If you receive an SVOG you will be required to maintain documentation demonstrating that you have complied with eligibility and other requirements of the SVOG program.

This will include retaining employment records for four years following receipt of a grant. All other records must be retained for three years.

PPP Loan

Because the entire PPP loan is subject to forgiveness, the rules are different for this program. PPP loans are made through an SBA-approved lender, creating another layer of bureaucracy.

When you accept a PPP loan, you do so with the understanding that any part of the loan that is not forgiven will have to be paid back.

Passage of the PPP Flexibility Act of 2020 on June 5, 2020, made important changes to PPP loan forgiveness that extended the amount of time you had to spend the money, lowered the percentage that must be spent on payroll, and more. Beginning with the passage of the PPP Flexibility Act of 2020, you had to use at least 60% of your PPP loan proceeds on “payroll costs” as defined in the CARES Act.

The CAA, 2021 made even more changes, including the creation of two tiers of PPP loans, First Draw and Second Draw. Passage of the PPP Extension Act gives applicants until May 31, 2021, to apply for a PPP loan, gives lenders until June 30, 2021, to process those applications, and extends the covered period for all PPP loans to June 30, 2021.

First- and Second-Draw PPP Loan Forgiveness Terms

First- and Second-Draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the eight- to 24-week covered period following loan disbursement:

• Employee and compensation levels are maintained (First Draw)
• Employee and compensation levels are maintained as required for the First-Draw loan (Second Draw)
• Loan proceeds are spent on payroll costs and other eligible expenses
• At least 60% of the proceeds are spent on payroll costs

Forgivable Expenses

The CAA, 2021 adds several new categories of forgivable uses of proceeds from your First- or Second-Draw PPP loan.

• Salary/wages/commissions, tips (up to $100K per employee)
• Benefits, including vacation, parental, family medical, or sick leave
• State and local taxes on compensation
• Utilities
• Rent/mortgage interest
• New—operations, including business software, cloud computing services, product or service delivery, payroll processing, human resources, sales and billing functions, or accounting for supplies, inventory, records, and expenses
• New—property damage not covered by insurance due to vandalism or looting in 2020
• New—supplier costs essential to operations or made pursuant to a contract in effect at the time of the PPP loan
• New—worker protection expenses to comply with requirements or guidance published by the Department of Health and Human Services, the Centers for Disease Control, the Occupational Safety and Health Administration, or any state equivalent from March 1, 2020, until the determination by the president of the end of the national emergency related to COVID-19
• New—group insurance costs including group life, disability, vision, and dental insurance benefits

Non-forgivable Expenses

You are not permitted to use your PPP loan proceeds for any of the following expenses:

• Salaries over $100K
• Payroll outside the U.S.
• Employer federal FICA tax credits
• Employer FFCRA credits
• Mortgage or debt principal

Consequences of PPP non-permitted use: If you use all or part of your PPP loan for non-forgivable uses, those expenses may be subject to immediate payback.

Additional PPP Forgiveness Requirements

In addition to the PPP loan’s permitted uses, you must also adhere to some additional requirements:

• You have your choice of between eight and 24 weeks from the first distribution of any loan amount (or June 30, 2021, whichever comes first) to spend your loan funds.
• Payroll costs must make up 60% (previously 75%) or more of the amount forgiven. This includes the first three categories listed under permitted uses above.
• Non-payroll costs can make up no more than 40% (previously 25%) of the amount forgiven and are defined as the last seven categories under permitted uses.
• To receive full forgiveness, you must retain (or rehire) all full-time-equivalent employees according to the baseline used to establish your loan, except as described in the Tip box above. You must do this within the covered period for your loan or by June 30, 2021, whichever comes first.
• The amount forgiven will also be reduced in proportion to any reduction in an employee’s salary or wages during the covered period greater than 25% of the average amount that the employee made during the base period unless an exception applies.
• If you have any ownership interest in an S corporation, C corporation, partnership, or sole proprietorship (Schedule C business), the maximum personal compensation you can count toward forgiveness for all companies you own is limited based on the length of the forgiveness period as a percentage of your 2019 or 2020 compensation, not to exceed $100,000. Health insurance and retirement plan costs are not part of this cap.

PPP Loan Tax Treatment

The IRS has ruled that any forgiven part of a PPP loan is exempt from being taxed as a “discharged debt.” This means you do not have to declare the forgiven part of your loan as income when you file taxes for 2020 in 2021.

The CAA further provided that ordinary and necessary business expenses that were paid with a forgivable PPP loan were completely deductible.

PPP Flexibility Act Payroll Tax Deferment

The PPP Flexibility Act of 2020 lets businesses that took PPP loans also delay paying their payroll taxes. This delay was extended by the CAA.

PPP Loan Forgiveness: You Need to Apply

The CARES Act requires that you apply to your lender for loan forgiveness at the end of the eight- to 24-week period following disbursement of your loan (depending on your selected date). To apply, you must submit the following:

• The total amount requested to be forgiven
• Verification of the number of full-time employee equivalents (FTEEs) on payroll and their pay rates, including IRS payroll tax filings and state income, payroll, and unemployment insurance filings
• Verification of your payments for covered mortgage interest, rent/lease obligations, and utilities
• Certification from an authorized representative of your company that the supplied documentation is true and that the amount forgiven complies with PPP guidelines

Revised Forgiveness Applications Available

On Jan. 19, 2021, the SBA and Treasury Department announced a revised Paycheck Protection Program (PPP) loan forgiveness application Form 3508, which incorporates changes made by the CAA, 2021. At the same time, the SBA published a new three-page “EZ” version of the application for those who:

• Are self-employed and have no employees; or
• Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number of or hours of their employees; or
• Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.

New Simpler Forgiveness Process for Loans of $150,000 or Less

Following the passage of the CAA, the SBA released a new, simpler (two-page) loan forgiveness application for PPP loans of $150,000 or less. Additionally, the SBA and the Treasury relaxed the rules for PPP lenders to allow them to process forgiveness applications faster.

You are eligible to use the new Form 3508S if your PPP loan totaled $150,000 or less; however, if the SBA’s affiliation rules apply and you and your affiliates together received loans totaling $2 million or more, you cannot use Form 3508S.

PPP Amount Not Forgiven: Payback Required

Any part of your PPP loan that is not forgiven must be paid back, either immediately, in the case of non-permitted use, or in the form of a five-year loan at 1% interest. Loan payments on permitted use, including principal, interest, and fees are deferred until the SBA remits your forgiveness amount to you or if you do not apply for forgiveness, for 10 months from the end of your loan-forgiveness-covered period.

An example of a permitted but not forgivable use would be utility costs that push your non-payroll expenses over the amount forgiven. Another example would be interest on non-mortgage debt in place on Feb. 15, 2020.

In addition, any PPP loans that were wrongfully forgiven, either due to omission or misrepresentation by the taxpayer, will be treated as taxable income. The IRS recommends that anyone this applies to file an amended tax return.

The Bottom Line

Government programs allow for forgiveness up to certain amounts for COVID-19-related loans if borrowers meet certain requirements. Take the time to explore the criteria to determine if you qualify and take advantage of possible financial relief.