PPP: The basics

Congress passed a new spending bill which includes provisions to restart the Small Business Association’s Paycheck Protection Program. This program provides loans to small and medium sized businesses to help keep their workforce employed during the pandemic and help mitigate the economic impact of the shutdown.

Here are some basics about how the new spending bill impacts the SBA's Paycheck Protection Program:

• The program reopened on 1/11/21 for first-time borrowers, and on 1/13/21 for second draw borrowers only through community financial institutions like CDFIs. Other SBA-approved lenders will begin accepting applications soon after (date TBD).
• The program closes May 31st, 2021. If you're planning to apply, prepare your documentation now and tell your lender of your intent to apply.
• Businesses who received a loan through the PPP may be eligible to receive a second (called a "Second Draw").
• In addition to payroll, rent, and utilities, it now also covers some operational expenses, inventory, and protective equipment.
• Business owners who receive the loan can now claim a tax deduction for expenses paid for using PPP funds.
• When the program opens, at least the first two days will be reserved for only community financial institutions (in order to give increased access to communities of color, women, and other traditionally disadvantaged groups).

Who’s eligible

This second round of PPP loans are open to the following groups if they were in business on Feb 15th, 2020:

• Businesses with 500 or fewer employees that are generally eligible for other SBA 7(a) loans.
• Sole proprietors, independent contractors, and eligible self-employed individuals.
• Not-for-profits, including churches, business leagues, chambers of commerce, tax-exempt Veteran's organizations, and Tribal business concerns
• Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.

People who are self-employed (you file a form 1040, Schedule C) are eligible for a PPP loan if they...

• Were in operation on Feb. 15th, 2020
• Have self-employment income as a sole-proprietor or independent contractor
• Reside in the US
• File a form 1040, Schedule C for 2019

Note: if you're a partner in a partnership, including an llc that files as a partnership, you should submit one PPP loan application for that partnership, not individually as a self-employed person.

Calculating the amount you can borrow

For small businesses:

1. Aggregate payroll costs for 2019 OR 2020 of US-based employees
2. Subtract any compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred
3. Divide by 12 to calculate your average monthly payroll costs
4. Multiply that monthly average by 2.5
5. Add any outstanding EIDL you'd like to refinance (must've been made between Jan 31, 2020 and April 3, 2020). Do not include the amount of any advance under an EIDL COVID-19 loan because it does not have to be repaid.

For self-employed people, please see this blog post for the new formula you'll use to calculate your loan amount.

Covered expenses

The PPP primarily covers payroll expenses, including salary, wages, commission, cash tips or the equivalent, payment for vacation, family, parental, medical, and sick leave, benefits like health care, life insurance, disability, etc., retirement, and any taxes on those payroll expenses.

For self-employed people, it can be used for wages, commissions, income, or net earnings from self-employment, or similar compensation.

60% of the funds must be used for payroll expenses. The remainder can also be used on:

• Mortgage interest payments
• Rent
• Utilities
• Interest on other debt incurred before Feb 15, 2020
• Refinancing an EIDL loan made between Jan 31st, 2020 and April 3, 2020
• Certain operational expenditures like payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses
• Property damage costs incurred in 2020 due to public disturbances
• Covered supplier costs (essential inventory)
• Covered worker protection costs (like masks, cleaning supplies)
• Capital expenditures to change business activities to comply with new regulations around COVID-19 transmission reduction (reconfiguring layout to allow social distancing, refitting HVAC systems, erecting physical barriers, expanding outdoor spaces, etc.)

Loan forgiveness

The SBA has released guidance on loan forgiveness here on SBA's website. In general, the PPP will be forgiven if the funds are spent in the allowable ways, the total is spent, and a forgiveness application is submitted.

Taking a 2nd loan from the PPP

Previous recipients of the PPP may apply again for another loan of up to $2 million if they meet these criteria:

• Have 300 or fewer employees.
• Have used or will use the full amount of their first PPP loan.
• Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.

Read this blog post to learn more about taking a second draw.

Thinking of applying? Here’s how to prepare.

• Talk to your accountant to see if the program is right for your business. Consider the terms for loan forgiveness and whether you’ll be able to meet those. 
• Reach out to your banker and express your interest in applying for the program. Ensure they’re an SBA-approved lender, get the application, and confirm what documents you’ll need. 

Then, gather the documents you’ll need for the application. This includes:

• PPP application (SBA form 2483)
• Confirmation of payroll costs. Small businesses use IRS forms 940, 941 (for all 4 quarters), or 944 and quarterly state unemployment tax. Self-employed with no employees use 1040 Schedule C and 1099 MISC.  Self-employed with employees, use 1040 Schedule C form 941 and quarterly state unemployment tax payment records.
• A payroll statement or similar documentation to prove you were in operation on Feb 15th, 2020
• Evidence of any employer health or retirement contributions
• Proof of ownership. For corporations and partnerships, you can use IRS form 1065 from 2019. For sole proprietors and independent contractors, form 1040 Schedule C.
• Information on each owner with over 20% stake in the business, including names, TINs, a copy of driver’s license or passport, and email addresses.

 

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Examples: calculating max PPP loan amount

Example 1 – No employees make more than $100,000
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Maximum loan amount is $25,000

Example 2 – Some employees make more than $100,000
Annual payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000:
$1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000

Example 3 – No employees make more than $100,000, outstanding EIDL loan of $10,000.
Annual payroll: $120,000
Average monthly payroll: $10,000
Multiply by 2.5 = $25,000
Add EIDL loan of $10,000 = $35,000
Maximum loan amount is $35,000

Example 4 – Some employees make more than $100,000, outstanding EIDL loan
of $10,000
Annual payroll: $1,500,000
Subtract compensation amounts in excess of an annual salary of $100,000:
$1,200,000
Average monthly qualifying payroll: $100,000
Multiply by 2.5 = $250,000
Add EIDL loan of $10,000 = $260,000
Maximum loan amount is $260,000