On December 27, 2020 the U.S. federal government signed a new bill into law. Included in this bill is a second stimulus package for businesses with a top up of the Paycheck Protection Program (PPP).
Editor's note: On Tuesday, May 4th the PPP ran out of general funds and the SBA stopped accepting new PPP loan applications. A reserve of funds is still available for community financial institutions that lend to businesses run by women, minorities, and underserved communities. Additionally, a reserve of funds remains for applications previously submitted but not yet reviewed by the SBA. If you have already submitted your loan application, however, this does not guarantee you funding.
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The Paycheck Protection Program is a loan program that originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This was originally a $350-billion program intended to provide American small businesses with eight weeks of cash-flow assistance through 100 percent federally guaranteed loans. The loans are backed by the Small Business Administration (SBA). You can read the bill in its entirety here.
The program was then expanded by the Paycheck Protection Program and Health Care Enhancement Act in late April, adding an additional $310 billion in funding. The Paycheck Protection Program Flexibility Act made important changes to the program allowing for more time to spend the funds, and making it easier to get a loan fully forgiven.
Then on December 27, 2020 a second stimulus package was signed into law topping up the program with an additional $285 billion in funding and updating the eligible expenses. It also opened up a second PPP loan for businesses that used up their first PPP loan and have experienced a 25% or greater decrease in revenue.
The following is a high-level overview of the PPP loan program, which we'll cover in more detail in the rest of this article.
At Accracy, we're helping businesses navigate stimulus funding by connecting them to lenders and assisting with PPP forgiveness applications.
Paycheck Protection Program loans are farther reaching than SBA disaster loans. Small businesses, sole proprietorships, independent contractors, and self-employed individuals are all eligible.
For second draw PPP loans in 2021, a key qualification was introduced. Businesses looking to apply for their second PPP loan will need to show a 25% or greater reduction in revenue. This will be shown by comparing revenue between any quarter in 2020 with the same quarter in 2019.
For example, say a business recorded $20,000 of sales revenue in the second quarter (Q2) of 2019. They would be eligible for PPP funding if they recorded $15,000 of sales revenue or less in Q2 2020.
Further reading: How to Calculate a 25% Reduction in Revenue for PPP 2
At least 60 percent of the PPP loan must be used to fund payroll and employee benefits costs.
The remaining 40 percent can be spent on:
If you stick to these guidelines, you'll be able to have 100% of the loan forgiven (effectively turning it into a tax-free grant).
Warning: As part of your application, you'll be asked to certify that you will spend the funds in the appropriate way. If you don't spend the funds in the right way, you could be charged with fraud.
Payroll costs under the PPP program include:
In other words, most payroll costs are covered. However, the following scenarios are not covered:
As mentioned above, payroll expenses are capped for individuals earning over $100,000.
If you or any employees had an annual salary over $100,000 in 2019 or 2020, you can only claim $100,000 (and nothing above it). So if an employee makes $120,000, you would subtract $20,000 from their salary for the purpose of the PPP. This would give you $8,333.33 as a monthly average payroll ($100,000 divided by 12).
If you are a sole proprietor or independent contractor without payroll and your net profit was over $100,000 in 2019 or 2020, this will also be capped at $100,000. You would divide this by 12 to get $8,333.33 as your monthly average payroll.
The maximum amount you can receive from your SBA-approved lender is your monthly average payroll cost in 2019, 2020, or the one year period before the application. Multiply it by 2.5, up to a maximum of $2 million.
For businesses in the food and accommodation industries, you are eligible for 3.5 times your average payroll costs, also with a maximum of $2 million.
If you are a seasonal employer, the monthly average payroll cost will be calculated differently. You can use any 12-week period between February 15, 2019 and February 15, 2020.
Here's a full rundown on how to calculate your PPP loan amount.
The SBA itself doesn't lend you the money, they just "back" the loan that the lender provides. You can check out the SBA's Lender Match tool to find an eligible SBA 7(a) lender.
As part of your application, you'll be asked to verify:
You'll need to provide payroll/bookkeeping records to prove your payroll expenses.
That could include:
If you have employees (and you're paying yourself through payroll too), the easiest way to get the financial information you'll need is by downloading a payroll report through your payroll provider.
If you're self-employed and don't yet have a completed Schedule C to submit, you will likely need to get retroactive bookkeeping to calculate your net profit for your Schedule C. Apart from bookkeeping, it will be very difficult to accurately show your net profit, which is the number your PPP loan amount will hinge on. If you don't have a reliable bookkeeping solution in place, Accracy can do your bookkeeping for you. Learn more about our catch up bookkeeping services.
We are hearing reports that entrepreneurs who own more than one business are having difficulty getting relief funding when their businesses don't have cleanly separated finances. If you own more than one business, it's important to get separate bookkeeping done for each business. This will become doubly important when it comes time to prove your expenses for loan forgiveness.
In the 24 weeks following your loan signing date, all expenses related to the following can be forgiven:
You'll need to keep your records and have accurate bookkeeping to prove your expenses during the loan period. You will also need to have spent 60% of the loan on payroll in order to qualify for forgiveness on the entire loan. Accracy's bookkeeping services can help you stay on top of your expenses to ensure you're maximizing your forgiveness amount.
When your covered period is up (or your PPP funds are spent), you will apply for forgiveness through your lender. Typically, this is being handled through online portals. Check your lender's website to see if one is available.
Once your lender has received your application, they must make a decision within 60 days.
Use our guide below to figure out which PPP forgiveness application form you should use.
The purpose of the Paycheck Protection Program is to, well, protect paychecks. You must commit to maintaining an average monthly number of full-time equivalent employees equal or above the average monthly number of full-time equivalent employees during the previous 1-year period. And you must spend 60% of the loan funds on payroll.
The amount that can be forgiven will be reduced"¦
If you rehire employees that were previously laid off at the beginning of the period, or restore any decreases in wage or salary that were made at the beginning of the period, you will not be penalized for having a reduction in employees or wages. For loans received in 2020, the deadline to do so was December 31, 2020. For loans received in 2021, the deadline is the end of your covered period.
Employees who were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness. To qualify for this exemption:
Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.
Further reading: PPP Rules on Rehiring (FAQ)
The new bill has confirmed how a PPP loan will affect tax filing. Any forgiven PPP loan amount will not be considered taxable income. Additionally, any expenses covered by a PPP loan will still be tax deductible.
Simply put, a PPP loan will not affect your tax filing process.
Yes! There is no harm in applying through more than one lender. Whoever processes your application first will receive an SBA approval number for your business (if you qualify for the loan). This number is called a PLP. The SBA will only issue one PLP for each Tax ID, meaning there is no chance you will accidentally get approved for two PPP loans.
If you are approved for a PPP loan, your application with the other lenders will eventually be rejected, so it's best to withdraw your application from the other lenders once you've been approved.
So far, there has been no guidance issued by the Treasury or SBA stating that you can only apply through one lender at a time. In fact, lenders are encouraging businesses to apply through multiple lenders, to increase their chances of getting processed in time.
The SBA also offers an Economic Injury Disaster Loan (EIDL)"”often shortened to just SBA disaster loan. This is a separate, but similar, initiative. Here's how they differ:
Yes, you can. However, you can't apply for an SBA disaster loan for the same purpose as the Paycheck Protection Program.
It will affect your PPP forgiveness application, but only if you do not plan on rehiring them or restoring their pay for their typical work hours. You must prove that you've maintained the salary and wages of your employees, and that their pay hasn't dropped below 25% of the stated monthly average for your forgiveness application.
If you're a sole prop, average monthly payroll expense is based on your self-employment income. More specifically, this is the net profit reported on your Schedule C. That is the number you pay tax on therefore it is treated as your salary. You can define your monthly average payroll expenses as that net profit number for the year divided by 12. Payroll expenses are capped for individuals earning over $100,000 so if you have greater than $100,000 in net profit, use $100,000 as your total income and thus $8,333.33 as the monthly average.
Further reading: Owner Draws and the PPP
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