If you are a small business owner who is struggling due to the impact of the COVID-19 pandemic, the Paycheck Protection Program (PPP) could help to relieve some economic burden. The Paycheck Protection Program is a loan to help small businesses with employee retention. PPP loans can be forgivable as long as the funds are allocated according to the rules of the program. The PPP has reopened and extended the application deadline until August 8, 2020. The recommendation is to apply for a PPP loan as soon as possible.
The PPP loans differ from other loans because they can convert to grants and are specifically for small businesses (typically with less than 500 employees) to help to maintain their employees and payroll. These loans have low interest, just 1%. Qualified businesses can borrow up to $10 million, calculated based on 2.5 times your average monthly payroll costs for 2019. As the name implies, this loan is intended to be used for the payroll, interest on mortgages, rent, and utilities. The most enticing characteristic of the PPP loan is it’s potentially forgivable—as long as you use the money according to the rules.
The following may be eligible for a PPP loan:
• Any small business that meets SBA’s size standards (either the industry based sized standard or the alternative size standard)
• Sole proprietors, independent contractors, and self-employed people
• Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 people per location
• Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
o 500 employees, or
o That meets the SBA industry size standard if more than 500
Additionally, all of the following must be true:
• You were already in operation on February 15, 2020
• Your primary place of residence is the United States
• Your business has filed a 2019 tax return with the IRS
• Certification in good faith that the loan is “necessary to support [your] ongoing operations” (i.e. the PPP loan is your only method of accessing critical funds)
The Small Business Administration (SBA) does not give loans directly. You have to apply through any existing SBA 7(a) lender, federally insured depository institution, federally insured credit union, or Farm Credit System institution, which then submits the application to the SBA. A list of available lenders state-by-state is linked below. Once the lender approves your application, it gets sent for approval from the SBA. If approved, you will receive a notification to sign final agreements, you will receive an SBA loan number, and payment should arrive in five to seven days. After receiving your PPP loan, you have just 24 weeks (or until December 31, 2020) to use the funds appropriately, or you will have to repay them within the next 5-10 years (depending on your lender).
Once the 24-week window has closed (or by December 31, 2020, whichever is sooner), you can submit a forgiveness request to your lender. The deadline to apply for interest-free forgiveness is 10 months after the last day of the covered period. As a borrower, you are responsible for documenting how you used the PPP loan and demonstrating you used the funds for eligible expenses.
For the loan to be fully forgiven, you must follow these conditions:
• 24 Weeks of coverage
Eligible expenses are those incurred over 24 weeks, starting the day your first payment is made. This may not be the same day you signed your loan agreement. No adjustments to payroll schedules are needed. All payroll costs incurred over the 24 weeks are eligible, even if the actual payout date falls outside.
• The 60/40 rule
At least 60% of your loan must be used toward payroll costs, with no more than 40% allowed for other expenses (interest on mortgages, rent, and utilities). If you are unable to meet these criteria, partial forgiveness may be available.
• Staffing and pay requirements
You must maintain the number of full-time employees on your payroll. Forgiveness will be reduced if full-time headcount decreases. There are exemptions to rehiring employees. If an employee rejects your re-employment offer, you may be allowed to exclude the employee when calculating forgiveness.
You must maintain at least 75% of the total salary. If the employee’s pay over 8 weeks is less than 75% of the pay they should have received, the eligible amount for forgiveness will be reduced.
• Rehiring grace period
You can rehire any staff that was laid off and reinstate pay that was decreased by more than 25% to meet forgiveness requirements. You have until December 31 to do so.
Loan Forgiveness is not automatic, and it may not cover 100% of the loan if you don’t follow the guidelines. Remember that thoroughly documenting your expenses during the loan forgiveness period can help increase forgiveness.
If you don’t qualify for 100% forgiveness, the amounts not forgiven simply convert into a 1% interest loan. If you do not request forgiveness, you will not have to make payments for 10 months following the date of disbursement of the loan (interest will still accrue).
Remember that you are not guaranteed a PPP loan. To maximize your chance of getting approved apply early. These loans are issued on a first-come-first-served basis, with no priority given to essential services. Applying to multiple lenders to see who funds you first can increase your chances as well. However, receiving more than one PPP loan may trigger a fraud alert, so make sure to withdraw other applications once you have been approved by one lender. It is also helpful to have these critical documents on-hand:
• Completed PPP Application Form
• Average Monthly payroll costs
• 2019 Proof of Payroll Costs (or Self Income)
• Proof of Ownership
• Government-Issued ID for All Owners Over 20%
• Email Addresses for All Owners
• Proof of Active and Good Standing Status
• Electronic Funds Transfer Information
Simply follow the PPP’s intent and run your business as usual.
If you need help to apply for a PPP loan, please give our office a call. You can also visit the following sites for more information.
State-by-state participating lenders: https://www.sba.gov/document/support-paycheck-protection-program-participating-lenders
Application: https://www.sba.gov/document/sba-form-2483-paycheck-protection-program-borrower-application-form
Forgiveness Application: https://www.sba.gov/document/sba-form-paycheck-protection-program-loan-forgiveness-application-revised-6-16-2020
Step-by-step Forgiveness application instructions: https://www.sba.gov/document/sba-form-paycheck-protection-program-loan-forgiveness-application-instructions-borrowers-6-16-2020
Have questions? Want more information about this topic? Contact the HOPE Accounting Firm at 216.744.9303 or at contact@hopeaccountingfirm.com.