This article is not meant as legal, tax, or business advice. The official guidance on the CARES Act and associated SBA Loan Programs changes on a frequent basis, and I do my best to interpret and update the information, but ultimately everybody is responsible for making the best decisions for their own businesses.
The Paycheck Protection Program (PPP) was officially rolled out on April 3, 2020. As I am writing this, it is in its second round of funding. In this article, I hope to summarize the program, explain how different business entities can apply, and give some of my personal take-aways.
What it is
The PPP is a forgivable loan program created as part of the CARES Act. The purpose of the program is to help small businesses keep employees on payroll through the COVID-19 pandemic.
All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply. The business must have been in business as of Feb. 15, 2020.
There is a 1% fixed interest rate. The loan will have to be paid back in 2 years. Payments for the first 6 months will be deferred. The loan can be repaid early with no penalties.
The loan can be forgiven if at least 75% is spent on payroll. The remaining 25% can be spent on rent, mortgage interest, and utilities. Any portion that is not forgiven will remain a loan with the above terms applying.
How do I find a lender?
Although an SBA program, the PPP is being administered by banks, Fintech companies, and other approved lenders. During the first round of funding, local community banks, for the most part, were able to come through for small businesses far better than the big national banks. As we are seeing in the news media, the big banks went out of their ways to take care of their biggest clients before reviewing smaller applications.
Here are my thoughts on what to do at this point
If you bank with a community bank, find out if they are accepting applications for the PPP. They will probably prioritize existing customers. Get your application in ASAP.
If you bank with a big national bank and have started the application process - This is a tricky one. If you got your application in early during the first round of funding, have submitted your documents, and have gotten communication back from the bank, you may want to consider staying the course and hoping that you are ahead in the queue.
If you bank with a big national bank and have not started the application process - You may want to consider finding a community bank that is accepting applications or apply through a Fintech company. Do your research! Ask fellow small business owners who they have had success with.
If you bank with a credit union - Credit unions are not approved SBA lenders. Find a community bank or Fintech company.
Fintechs processing PPP applications - Financial technology companies (or “fintechs”) got into the PPP game midway through the first round of funding. Companies such as Paypal, Lendio, Square, and a growing list of fintechs are a great option if you are unable to find a local bank to accept your PPP application.
Can you apply with more than one lender at a time? I don't see any harm in putting in several applications and seeing which approves you first. However, you will only be allowed one PPP loan.
How much can I get?
The amount of loan proceeds will equal your average monthly payroll costs X 2.5.
How to Calculate Average Payroll Cost
The calculation will differ based on the type of business entity, whether or not you have employees, and whether or not owners are paid through payroll.
First, you will determine the time period for which to determine your payroll cost.
You have a few options as to which time period you can use to calculate your average payroll cost
The last 12 months (April 1, 2019 - Mar 31, 2020)
Seasonal business can use March 1, 2019 - June 30, 2019
For most businesses, it will be easier to choose calendar year 2019, as most tax forms use this time period.
What is considered payroll cost?
W-2 employee wages, salary, and tips (not to exceed $100,000 a year)
Owner salary paid through payroll (not to exceed $100,000 a year)
Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefits
State and local employer paid payroll taxes
For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 a year.
What is NOT considered payroll cost?
Payments to 1099 contractors do NOT count toward your payroll cost, since they have the ability to apply for the PPP themselves.
Owner or shareholder draws are not considered payroll.
You will need payroll summary reports from your payroll provider in order to calculate payroll costs. You will also be asked to submit 941s and W2s with your PPP application.
What if you pay yourself through payroll?
(S-Corp, C-Corp, LLC taxed as S-Corp)
You will use your 2019 W-2 Salary (capped at $100,000).
What if you have employees but do not pay yourself through payroll?
(Sole Proprietor, LLC taxed as Sole Proprietor, LLC Partnership)
You will use the above payroll definition for your employees.
To get the owner’s payroll average, you will use the amount on your 2019 Form 1040 Schedule C Line 31.
To get partners' payroll average, you will use the following formula:
2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment of individual U.S. based general partners that are subject to self-employment tax, computed from box 14a (reduced by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties) multiplied by 0.9235, up to $100,000 per partner.
What if you have not filed a tax return for 2019 yet?
Self-Employed individuals will have to present certain 2019 tax forms with their applications.
Sole proprietors or Single Member LLCs taxes as sole proprietors will have to present their 2019 Form 1040, Schedule C.
Partnerships will have to submit their Form 1065 and K-1s.
Even though the tax filing deadline has been extended to July 15, you will still need to submit these 2019 forms with your PPP application.
My advice is to get your 2019 taxes files ASAP or work with your accountant to draft these forms quickly. You can fill out and submit the forms, even if they have not been officially filed with the IRS.
Not sure if you will be able to get the loan forgiven?
If your business was forced to close because of stay-at-home orders, or you have reduced staff due to slow-down of business, chances are you have laid off or furloughed your employees. In order to have the full loan forgiven, you would be expected to bring all of your staff back and pay them their regular wages. You could find creative ways to keep them busy, such as paying them to do social media marketing, or having them safely deep-clean your facility so that when operations are allowed to resume, you can do so quickly.
However, this may not make sense for some businesses. Employees who have been receiving unemployment may want to remain on it. There are legitimate concerns that taking staff off unemployment and possibly having to furlough them again after 8 weeks would create instability for them.
Even if you do not receive full forgiveness, this is a 1% interest loan that you have 2 years to repay. Not a bad deal. You can always repay it early with no penalty. I would suggest hanging on to the money as a cash reserve while times remain uncertain.
How will forgiveness work?
There are still many unanswered questions as to exactly how forgiveness will be granted once the 8 week period is over. I would suggest keeping good records of all forgivable expenses. Having your books in accounting software and only using your business bank and credit card accounts for expenses will be important. When you receive the funds, budget out exactly how much you can spend on payroll, and how much you can spend on rent and utilities.
Does the EIDL advance affect forgiveness?
Yes. If you received the Economic Injury Disaster Loan (EIDL) advance (up to $10,000), your forgiveness of the PPP will be reduced by that amount.
Can you have both an EIDL and PPP loan?
Yes. You cannot use them for the same purposes during the 8 week forgiveness window of the PPP. You could, however, use the EIDL funds for payroll after the 8 week PPP window is over. Quite a few businesses have received the EIDL advance, but the actual loan has been slow to materialize. More on that in a future blog!