April 08, 2020
There has been a great deal of misinformation floating around the internet related to the implementation of the CARES Act, particularly when it comes to the availability of the Emergency Impact Disaster Loan (“EIDL”) grants. For instance, we have seen professionals incorrectly recommending that everyone apply—even those in industries that are expressly excluded from the program’s eligibility—and that all businesses will receive the full $10,000 payments tax free—all not necessarily true.
That said, we saw information from a reputable source—United States Senator Brian Schatz of Hawaii—who has indicated that:
The law provides that applicants can request up to $10,000; however, because of high demand, the SBA has decided to scale the advance and will provide $1,000 per employee for up to ten employees. For example, an applicant with two employees would get $2,000, an applicant with ten employees would get $10,000, and an applicant with more than ten employees would still get $10,000.
This was seemingly confirmed by the Massachusetts district office of the SBA, which sent out an email in which it stated that:
EIDL Loan advances will start to be distributed this week. $1000 per employee up to $10,000 max
Like many parts of the SBA’s implementation of the CARES Act, the Small Business Administration seems to have taken some liberties in employing a per-employee threshold for the grants that is not present anywhere in the CARES Act. This is also similar where the SBA has advised that only those that will use 75% of their PPP loan for payroll are eligible for the program—even though that requirement is not seen anywhere in the CARES Act. Because this money being given out to stem the ongoing crisis, while someone may challenge the rules and operating procedures in future years, the funds from the program will likely be long-since exhausted by the time that any decisions regarding the rulemaking are reached.
We still have not seen any guidance from the Department of the Treasury whether the EIDL grants will be treated as taxable income or tax-free debt forgiveness—like the Paycheck Protection Program loans included in the CARES Act. The general presumption in tax law is that any payment is taxable unless expressly tax-free. So, even if you are successful in getting the $10,000 grant, our recommendation would be to plan for an increased $10,000 in income—at least until there is guidance that the money is tax free.
Unfortunately, much of the misinformation going on will lead to those that are ineligible applying—leading to a longer logjam for those that are eligible for the programs and badly need the funds sooner than later. We have already successfully helped numerous clients get approved for their PPP loan applications with little to no follow up required by the lender. But, we also have had to advise a number of clients that have received incorrect counsel elsewhere.
Even though loan applications may get approved now, that does not mean that the SBA will not appoint an inspector general in coming years to investigate fraud that occurred as part of the implementation of the CARES Act. In fact, Monday morning, the SBA circulated white papers on “Risk Awareness and Lessons Learned from Prior Audits of Economic Stimulus Loans” and “Risk Awareness and Lessons Learned from Audits and Inspections of Economic Injury Disaster Loans and Other Disaster Lending.” Further, the Interim Final Rule implementing the Paycheck Protection Program, which has not even been published in the Federal Register as of April 8, puts most of the burden for truthful applications on the borrower—even if the SBA lender approves your loan application. This was confirmed by the SBA in FAQs—that banks are allowed to rely almost exclusively on certifications by the borrower. This means that obtaining the correct counsel is all the more important. If you are unsure as to information that you are seeing, we would strongly caution you to inquire of your CPA or legal counsel.
We will continue to provide updates to our clients as we see them happening.