In the wake of COVID-19 becoming a worldwide epidemic, the U.S. Congress has passed the $2 trillion stimulus package to ease the economic pressure on citizens and businesses across the country. Among the most important pieces in this package is the Payroll Protection Program (PPP), designed to assist small businesses in keeping afloat in these uncertain times.
The Paycheck Protection Program prioritizes millions of Americans employed by small businesses by authorizing up to $349 billion toward job retention and certain other expenses
But whenever a new economic bill is introduced, people are bound to be confused—especially when you’re dealing with something as convoluted as this $2 trillion stimulus package.
How and where should you apply for the PPP? What financial and tax information will you need? How will the loan amount be determined?
Don’t panic! I’m here to answer those questions and more.
1. Which businesses are eligible?
Most Small businesses with 500 or fewer employees may apply. That includes:
- Sole Proprietorship’s
- Self-employed Individuals
- Independent Contractors
- Tribal Business Concerns
- Veterans’ Organizations
2. How much money can I borrow?
The PPP lets eligible small businesses borrow a maximum of 250% of their average monthly payroll expenses, with a cap of $10 million. The full amount depends on how long a business keeps operating from when the pandemic officially started—February 15, 2020—until December 31, 2020.
In other words, the loan can cover as much as two months of your average monthly payroll expenses plus an additional 25% of that amount. However, the total amount cannot exceed $10 million.
To calculate the amount, most applicants will need to use their average monthly payroll from 2019, excluding any annualized costs over $100,000 for each employee.
There will obviously be cases where that isn’t possible. For those, the method will be a little different:
- Seasonal businesses may instead use their average monthly payroll for the time period between February 15, 2019–June 30, 2019 (excluding any annualized costs over $100,000 for each employee).
- New businesses may calculate their average monthly income based on the time period of January 1, 2020–February 29, 2020 (excluding any annualized costs over $100,000 for each employee).
- Independent contractors and sole proprietors can use their schedule C net profit divided by twelve (excluding excess profit that exceeds $100,000). Payment made to contractors that do not exceed $100,000 are covered.
3. What can I use the money for?
The loan is intended to cover 8 weeks of payroll expenses, as well as other vital employee benefits and operating expenses such as:
- Payroll costs, including benefits
- Utility services that began before February 15, 2020
- Rent under lease agreements in force before February 15, 2020
- Interest on mortgages incurred before February 15, 2020
As long as the loan is used for the expenses listed above within the 24-week time-frame from February 15, 2020–December 31, 2020, it can be forgiven. Small businesses that honor the specified uses won’t have to pay the money back.
However, if you do not maintain your staff and payroll, your loan will not be fully forgiven.
- If your number of full-time employees decreases, your loan forgiveness amount will be reduced.
- If you decrease wages and salaries by more than 25% for any employee that made less than $100,000 in 2019, your loan forgiveness amount will be reduced.
- If you made any changes to your full-time employee headcount or salary levels between February 15, 2020, and April 26, 2020, you have until December 31, 2020, to re-hire and return to previous levels, or your loan forgiveness amount will be reduced.
4. Can I use the loan for any expenses other than the ones listed above?
Yes and no. If you use the loan amount for anything other than payroll costs, rent, mortgage interest, and/or utilities payments within the right time-frame, the loan will not be forgiven. You will owe money and will be liable for paying principal and accumulated interest.
If you do not have a legitimate need for this money for the above purposes, I highly recommend you stay away from it—and all other government loans you don’t absolutely need.
5. If my PPP loan is forgiven, will it still be taxable?
No. If a PPP loan is forgiven under this program, it will be excluded from your income for tax purposes.
However, the loan forgiven becomes Tax Exempt Income. Section 265 precludes the deduction of any associated expenses incurred from the use of such “exempt income.”
Notice 2020-32 clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.
6. What is the interest rate?
According to the Fact sheet found on the IRS website, interest rate can be as low as 1%
7. When would I need to pay interest on the loan?
Payments are deferred for 6 months. However, interest will accrue during that time.
8. What If I already took the EIDL loan?
You maybe able to refinance your original EIDL loan into a PPP loan, then add any outstanding loan payments to your payroll expense.
9. When will I be able to apply?
Sole proprietorships and small businesses can apply starting April 3, 2020.
Self-employed individuals and independent contractors can apply starting April 10, 2020.
10. Where can I apply?
Your bank will take online applications soon. Most major banks such as Wells Fargo, Chase, and BBVA, have already started contacting their customers.
11. What documents do I have to include in an application?
- Payroll reports for 2019 and 2020 year-to-date with a record of employees’ and/or officers’:
- A record of the total retirement plan funding contributed by the employer (including SEP IRAs & Simple IRAs as well as 401K plans)
- Health insurance premiums paid in a group health plan by the employer
12. How long will this program last?
Technically, the program will remain open until December 31, 2020—but there is a funding cap, so you’ll want to apply as soon as you can.
13. Should I contact the IRS regarding loan forgiveness for this program?
No. Your bank will handle that.
You will have to submit a request to the relationship manager that services the loan. The request must include documents verifying your pay rates and a headcount of full-time employees as well as your lease, mortgage, and utility records for the timeframe. You will have to show that you only used the forgiveness amount to retain your employees and make eligible payments.
Within 60 days of receiving your request, the relationship manager will decide whether you qualify for loan forgiveness.
14. Will I need to guarantee the loan personally?
No. There is no requirement for a personal guarantee.
However, if you use the proceeds for any fraudulent purposes, the U.S. government will pursue criminal charges against you.
How about a little help?
If you could use some help with applying for the PPP loan, you’re far from alone. I’d be happy to answer any questions you have. I’ll gather all the required documents for you and prepare the necessary forms and application. I’ll even work with your SBA approved Lender throughout the application process—and after.
Best of all, you wouldn’t even have to pay me. You see, I’d be paid by your lender or bank out of the fees received from the SBA. For assisting in the preparation of your application for a PPP loan, I may collect payment from the lender up to:
- 1% percent for loans of $350,000 or less
- 0.50% for loans between $350,000–$2 million
- 0.25% for loans of $2 million or more
The act passed by congress does not require me to collect loan application fees from you or be paid out of the PPP loan proceeds. It’s all totally above board, and everyone wins!
If you’d like my help, just let me know. Let’s talk!