The U.S. federal government introduced a new bill on December 27, 2020, that consists of provisions for a second stimulus package for businesses seeking aid from the Paycheck Protection Program (PPP). Read on to know about the PPP, its eligibility requirements, caps, funding, and more.
The PPP is a loan program created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help small businesses withstand the unprecedented economic disruption brought about by the COVID-19 crisis. Implemented by the U.S. Small Business Administration (SBA), with a $350 billion funding, this program aimed to offer small businesses in America 8 weeks of cash-flow assistance by federal loans.
This program was later expanded by the Paycheck Protection Program and Health Care Enhancement Act with an additional $320 billion funding. Some significant changes were made through the Paycheck Protection Program Flexibility Act, permitting more time to expend the funds and making a loan forgiven in full easier.
On December 27, 2020, the new Consolidated Appropriations Act, 2021, was signed into law by then President Donald Trump. This law added an additional $284 billion in funding and updated eligible expenses. A provision was also introduced to allow businesses who have suffered a 25% or greater drop in revenue to apply for a second PPP loan.
PPP – Key Features
The following are a few prominent features of the paycheck protection loan program –
- The PPP loan has a maturity rate of 2 years and a 1% interest rate
- Loans applied on or after June 5, 2020, have a maturity period of 5 years
- All small businesses are eligible to apply
- No fees required
- No Collateral or personal guarantees necessary
- Loan to cover expenses for 24 weeks after the loan disbursement date
- The loan can be forgiven and turned into a non-taxable grant if proper guidelines are followed
- You can apply for this loan through any of the approved 7 (a) lenders
PPP Loan Eligibility Requirements
The PPP loans are more comprehensive than the SBA disaster loans.
- All small businesses — tribal business concerns, veteran organizations, non-profits, independent contractors, sole proprietorships, self-employed individuals — with 500 or fewer employees are eligible for this loan (300 or fewer for second draw loans).
- Certain businesses with more than 500 employees can also apply if they meet the applicable U.S. SBA employee-based standards in their specific industries.
- Another requirement for procuring this loan is that your business must be in operation on February 15, 2020.
- A key requirement was introduced for businesses seeking to draw a loan for the second time in 2021. These businesses will have to indicate a 25% or greater decrease in revenue to be eligible for the second loan. The comparison will be between the two corresponding quarters in 2019 and 2020.
A simple example is if an ‘XYZ’ business had revenue of $50,000 in Q2 of 2019 and registered a drop to $25,000 in the Q2 of 2020. Since this business registered a greater than 25% drop in revenue, it is eligible for a second PPP loan.
- Another eligibility criterion for the second loan is that your business should have or will use the proceeds from the first loan by the time the second loan is sanctioned. The first loan should also have been spent on eligible expenses.
PPP Second-Draw Exclusions
Round 3 guidelines exempt businesses from applying for a second loan if the business is –
- Permanently closed
- Primarily engages in political activities and lobbying
- Ineligible under current SBA regulations
- Owned by an entity created in or with significant operations in the Special Administrative Region of Hong Kong, or the People’s Republic Of China
- Has a board member who is a citizen in the People’s Republic Of China
- Recipient of, under Section 24 of the Act, a shuttered venue operator grant
What Is A PPP Loan Used For?
It should be noted that a minimum of 60% of the PPP loan should be used to fund the payroll and employee benefit costs. You can use the remaining 40% of the funds on –
- Operations expenditures
- Mortgage interest payments
- Rent & Lease Payments
- Worker protection expenditures (to ensure COVID-19 compliance)
- Supplier costs
- Property damages caused by public disruptions and which are not covered by insurance
Strict adherence to these guidelines can ensure the loan to be forgiven in full and essentially turning the loan into a non-taxable grant. You need to keep in mind that if the funds are not spent appropriately, you may be charged with fraud.
What Are Payroll Costs?
The PPP Program categorizes the following as payroll costs –
- Commissions, salary, wages, tips, bonuses, and hazard pay (a maximum of $100,000 on an annual basis for each employee).
- State and local taxes.
- Employee benefits including vacation, medical or sick leave allowance, group healthcare benefits including insurance premiums, retirement benefits, etc.
- For a sole proprietor or independent contractor: Wages, income, commissions, and net earnings from self-employment. These are capped at $100,000 on an annual basis for each employee.
Note: Payments made to independent contractors or S corps and C corps who aren’t on the payroll are not covered.
What is the $100,000 salary cap?
Payroll expenses have a cap of $100,000 for individuals. You cannot claim a higher amount even if your previous annual salary was higher than $100,000. This provision applies to employees, sole proprietors, and independent contractors as well.
How Much PPP Funding Can One Receive?
The maximum PPP funding one can receive from an SBA-approved lender is their monthly average payroll cost in the past year. You can multiply the average cost by 2.5, however, the ceiling is $2 million. The same ceiling applies to the businesses in the food and accommodation industries, but with 3.5 times the average payroll cost.
The monthly average payroll cost calculation is different for seasonal employers. Any 12 weeks between February 15, 2019, and February 15, 2020, can be used to calculate.
How To Apply For A PPP Loan?
You should note that the SBA doesn’t lend money; it just supports and backs the loan an eligible SBA 7(a) lender provides.
You’ll have to verify/provide the following as part of your application –
- Proof that the current economic conditions make the loan necessary to support ongoing operations
- Acknowledgment that the lender will calculate the loan using the tax documents you provide. These documents, in turn, should be identical to the ones submitted to the IRS
- Documentation verifying the full-time employees on the payroll, the payroll costs, covered mortgage interest payments, covered utilities, and covered rent payments for the following 24 weeks after getting the loan
- The loan will be used to retain employees and maintain payroll costs, make the mortgage, lease, and utilities payments, etc.
Required Financial Documents
You need to provide payroll/bookkeeping records to prove your expenses. These records can include –
- Form 1099-MISC records
- Payroll Tax Filings
- Payroll Processor Records
- Payroll Tax Forms from 2019 or 2020 (Forms 941,940, and W-3)
- Schedule C in case of a sole proprietorship
The easiest way to get the required financial information is by downloading a payroll report through your payroll provider. It is also essential for the self-employed and those with multiple businesses to have reliable bookkeeping. It is ideal to maintain separate finances for each business.
Applying For PPP Loan Forgiveness
You can apply and can be granted complete forgiveness if you used the proceeds from the loan on the following: payroll, mortgage interest, rent, utilities, operations expenditures, property damage costs that can’t be covered by insurance, suppliers costs, and worker protection expenditures (COVID-19 Compliant).
(Note: Mortgage, rent, utility services should be in effect from before or on February 15, 2020.)
As mentioned in an earlier section, at least 60% of the loan has to be used on payroll to qualify for loan forgiveness. You need to keep and have accurate bookkeeping records to prove the authenticity of your expenses.
Since the very purpose of the PPP is to protect paychecks, as a business, you must commit to maintaining an average number of monthly full-time equivalent employees or more than the average number of monthly full-time equivalent employees in the past year. Following these provisions will reduce the amount to be forgiven –
- If wages were reduced by more than 25%
- And proportionate to the reduction of retained employees
You can apply for loan forgiveness through your lender after your covered period is over or if your funds are spent. This process can be handled on online portals. You can check your lender’s website to see if such an option is available. Once the lender receives your application, they must decide within 60 days.
Exemption on Re-hiring Employees
If an employee does not wish to and rejects your employment offer, you can exclude the particular employee when calculating forgiveness. You will have to have made an offer in writing to rehire in good faith, offered to rehire for the same wage and number of hours before their lay off, and must have documentation of the employee’s rejection to qualify for this exemption.
Note: Employees who deny re-employment offers may not be eligible for continued unemployment benefits.
Paycheck Protection FAQs
Can PPP Loan Forgiveness Affect Taxes?
Forgiven PPP loan amount is not considered as taxable income. Any expenses spent using the PPP loan are tax-deductible. A PPP loan, in essence, does not affect your tax filing procedure.
Can PPP Loan Be Applied Through More Than One Lender?
Yes, you can apply for a PPP loan through more than one lender. If you qualify for a loan, your application gets an SBA approval number (PLP) for your business. The SBA assigns only one PLP for each TAx ID, so you cannot get approval for two PPP loans. Besides, when your application is approved for a loan, your application with the other lenders is rejected.
Will Reducing Workforce Affect PPP Application?
It will affect your PPP loan forgiveness application if you don’t plan to rehire them or restore their wages and typical working hours. To qualify for loan forgiveness, you need to prove that you’ve maintained your workforce’s wages and Salary and that their pay hasn’t been reduced to less than 25% of the stated monthly average for your application.