One of the most common area of questions I have seen over the past 4-6 weeks, besides tax-related and QuickBooks related questions, has been in the area of PPP loan application and PPP loan forgiveness processes. PPP stands for Paycheck Protection Program. It was enacted as part of the CARES Act and signed into law on June 5th, 2020 with a goal of providing loans (at low interest rates) to small businesses impacted by the COVID-19 pandemic. The loans allow these businesses to maintain their workforce and payroll.
The first wave of loans was disbursed in April, 2020, where allotted funds ($349 billion) ran out in 14 days. On January 11th, 2021 the second wave of loans began to be disbursed.
Since January 11th I have received a number of questions from clients and small business owners asking for assistance in understanding what the loan means to their businesses and assistance in applying for loans. These questions have led to this article. The goal of the article is not to exhaust all that small business owners need to know about filing a loan application and/or requesting information on loan forgiveness – quite frankly the world of PPP loans is still evolving. The goal is to simply provide answers to a few basic questions that will help point business owners in the right direction.
Note: I strongly recommend that if you are eligible and decide to proceed with either the loan request application or the forgiveness application, please reach out to your CPA for guidance to confirm your business’ eligibility and to ensure that if you do apply your application is filed correctly.
Who Is Eligible For A PPP Loan?
Eligibility depends on whether an applicant is a first-draw loan applicant or a second-draw loan applicant.
First-draw loan applicant:
- Business was in operation as of Feb.15, 2020, and
- Business has 500 or fewer employees and was eligible for other SBA 7(a) loans, or
- Business entity is sole-proprietor, independent contractors, eligible self-employed individuals, or
- Not-for-profits, or
- Accommodation and food services operations with fewer than 500 employees per physical location, or
- News organizations that are majority-owned or controlled by an NAICS code 511110, or 5151 business, (employees per location maximum limit is 500), or
- 501(c)(6) business leagues that have 300 or fewer employees and do not receive more than 15% of lobbying receipts
Second-draw applicant:
- Business has 300 or fewer employees, and
- Business experienced revenue reduction of 25% or more in all or part of 2020 compared with all or part of 2019, and
- Business will, or has, used the entire amount of the first PPP loan on or before the 2nd PPP loan disbursement expected date. Usage must have been on eligible expenses.
What Is The Difference Between A First-Draw PPP Loan Applicant And A Second-Draw PPP Loan Applicant?
A first-draw PPP loan applicant is an entity that is receiving a PPP loan for the first time. That is, the entity did not receive a PPP loan in 2020.
A second-draw PPP loan applicant refers to an entity that received a PPP loan in 2020 and is applying for a second PPP loan in the 1st quarter of 2021.
Can I Apply For A Second-Draw Loan If I Received A First-Draw Loan?
Yes. As long as an applicant meets the eligibility requirements under the “second-draw PPP loan” rules (see above), the applicant can apply for another PPP loan.
What Is The Deadline For Applying For A Second-Draw Loan?
The deadline for filing a second-draw PPP loan is March 31, 2021.
Note: Funding ($284.5 billion) could run out before this date. If you plan to apply for a loan, consider doing so as soon as possible.
What Is The Maximum Amount I Can Apply For?
- For first-draw applicants the maximum loan amount is $10 million.
- In general, any applicant can get a loan for 2.5 times the entity’s average monthly payroll expenses in 2019, 2020, or the year prior to the loan – the cap is $100,000 annualized per employee.
- Applicants with NAICS codes starting with 72 (hotels, restaurants, caterers, RV campgrounds etc.) applying for second-draw PPP loans can obtain loans for up to 3.5 times their average monthly payroll costs.
Can I File For A Simplified PPP Loan Forgiveness?
The short answer is, yes. However, there are requirements that must be met before forgiveness will be considered. The basic (please contact your CPA for more detail on the requirements) requirements:
- At least 60% of funds must be spent on payroll over a covered period of time
- Funds must be used for eligible expenses
- Loans for $150,000 or less may receive forgiveness if the borrower signs and submits the proper certification and documentation to the lender. See SBA Form 3508 https://www.sba.gov/sites/default/files/2021-01/PPP%20–%20Forgiveness%20Application%20and%20Instructions%20–%203508%20%281.19.2021%29-508.pdf
- A borrower can apply for loan forgiveness at any time after all the funds are used, but before the maturity date of the loan in question.
What Are Eligible Expenses?
Eligible expenses to use PPP loan funding for include:
- Payroll costs (includes group insurance, vision, dental, disability and life insurance)
- Rent or leases (dated before Feb.15, 2020)
- Mortgage interest (incurred before Feb.15, 2020)
- Utilities (incurred before Feb. 15, 2020)
- Essential supplier/vendor expenditures for business operations; including business software or cloud services
- Property damage costs related to vandalism and looting in 2020 due to public disturbances – limited to costs not covered by insurance or other means
- Covered worker protection and facility modification expenses necessary to comply with COVID-19 FSA guidelines
Hopefully the information provided in this article will help you make sound and informative decisions on what steps your business needs to take with regards to PPP loans. Again, please reach out to your CPA or accountant for further help. Not working with an accounting consultant? Give us a call, we would be happy to answer your questions.
Please note, pieces of information used in this article came from the websites of American Institute of Certified Public Accountants (AICPA) and Small Business Administration (SBA).
