PPP Loans Still Available for Those Who Need Them – Especially Small Businesses
Payment Protection Plan loans are still available from the Small Business Administration for companies who need them. You can even get a second loan if you already received one last year. The goal of the forgivable loans is to help companies keep workers employed during the pandemic.
The second round of PPP loans is slated for $284 billion and the application period expires March 31, 2021. From now until March 9 at 5 PM Eastern time, the SBA is only accepting applications from companies with less than 20 employees. This is an attempt to encourage small companies and sole proprietors to take advantage of the assistance.
To help businesses get the assistance they need, we’re going to take a look at who qualifies for a PPP loan, how much you can get, and whether you have to pay it back. Then we’ll give some tips for making the process easier.
Who qualifies for a PPP loan?
Any business that has employees working in the United States is eligible for a PPP loan. This includes freelancers, sole proprietors, independent contractors, self-employed workers, small businesses, corporations, and nonprofits. To qualify for the small business focus period that expires on March 9, a business has to have less than 20 employees. Companies with more than 20 employees can apply for this round up until March 31.
If you already received a first-round loan in 2020, you are eligible to apply for a second round of assistance, if you meet the following requirements:
- have no more than 300 employees
- used the full amount of the first loan
- have a 25% reduction in quarterly revenue in at least one quarter of 2020 as compared to the same quarter in 2019
You can apply for both rounds of loans by contacting a lender or bank. The SBA has a tool to help you find a lender that can administer the PPP loan in your area. There are no fees for applying or taking out a loan, no collateral is required, and you won’t have to sign a personal guaranty.
How much can you get?
The PPP loan is designed to cover business expenses including:
- operations expenses
- property damage
- supplier invoices
- worker protection
- personal protective equipment
- mortgage payments
- cloud computing services
The money received through PPP loan is not federally taxable and is not recorded as income on your federal tax return. States have adopted different rules regarding the taxability of PPP funds, so check with your state tax website to see if your loan funds are taxable.
The amount of funds you are eligible to receive is based on payroll costs for either 2019 or 2020, depending on which you choose to use. The loan is designed to give you approximately two and a half months’ worth of expenses. Here are the calculations for computing the loan amount for different business types:
Self-employed with no employees
Net profit from 2019/2020 divided by 12 multiplied by 2.5
Self-employed with employees
Net profit from 2019/2020 plus wages plus benefits plus retirement plans plus payroll taxes divided by 12 multiplied by 2.5
Each partner’s income (as per 2019/2020 tax return) plus employee wages plus benefits plus retirement plans plus payroll taxes divided by 12 multiplied by 2.5
S and C corporations
Wages plus benefits plus retirement plans plus payroll taxes divided by 12 multiplied by 2.5
Note that wages for anyone employee are capped at $100,000 when calculating the cost of wages for the company.
Let’s look at an example. If you are a small contracting company with yourself and two employees, you would calculate your potential loan amount this way:
Net profit from 2019 = $100,000
Wages from 2019 = $100,000
Benefits paid (including health insurance, dental, vision) = $20,000
Retirement plan contributions = $10,000
Payroll taxes (employer portion) = $5,000
Total of all expenses = $235,000
Monthly expenses (divide total expenses by 12) = $19,583
PPP loan amount (monthly expenses multiplied by 2.5) = $48,958
Do you have to pay it back?
PPP loan amounts are forgivable if the funds are used for eligible business expenses and the following conditions are met:
- funds are used within 24 weeks of receiving them
- maintain employee/compensation levels
- at least 60% of the funds go to payroll expenses
Once the funds have been spent, companies can apply for forgiveness from the lender or bank that supplied the loan. Companies have until 10 months after the funds have been spent to apply for forgiveness.
If the funds are not used according to the requirements, then the loan amount has to be paid within five years at 1% interest. Repayment starts 10 months after the coverage period (24 weeks) has expired. Companies made have to pay back some of the funds that don’t meet the requirements while the balance of their loan is forgiven.
Tips for navigating the PPP process
- Look for nontraditional lenders that can provide PPP loans. Internet payment providers, like PayPal, are offering loan processing and funding to their customers. These may be easier to work with than a traditional lender.
- When applying for a PPP loan, make sure you have your backup documents in order. You’ll need to provide tax returns for the year you’re basing your payroll costs on, as well as payroll records documenting the amounts paid for wages, benefits, and taxes. If you are using 2020 figures to calculate your PPP amount, you’ll need to provide similar documents with similar calculations as backup for your application.
- When using PPP funds to make purchases, pay invoices, or fund payroll, track the funds separately than your normal business expenses. You can set up separate expense accounts in your general ledger for PPP eligible expenses and categorize all your costs accordingly. This will help you track the amount you’ve spent, as well as help with gathering backup documents when it comes time to apply for forgiveness.
- Consider opening a separate bank account for your PPP loan funds. This makes tracking the funds easier and will speed reporting when it comes time to apply for forgiveness.
Help is available
If you own a small business and are struggling due to the pandemic, there are resources available to help. These resources can help sole proprietors, self-employed workers, and small business owners. You can find out more about the PPP loan program at the SBA’s website. Banks and other financial institutions are also available to help you with the process.