With the Covid Relief Bill signed into law in December, 2020, the Paycheck Protection Program (PPP) has been reactivated. Eligible small business owners and self-employed individuals can now apply for a first-time or second draw PPP loan—through May 31, 2021 or until PPP funds run out. Fundbox is no longer accepting PPP applications, however, the SBA can help you find a PPP lender. Some important changes have been made to the PPP, and this article explains the basics of the loan and what’s new or different due to the new law.
While correct to the best of our knowledge at the time of this publication, details shown here may change once the Small Business Administration (SBA) issues further guidance.
Quick overview of the PPP loan
Established to relieve small businesses (including sole proprietors and independent contractors) who have been negatively impacted by the coronavirus pandemic, the PPP can provide 1% interest loans up to $2 million (the limit used to be $10 million).
Calculated primarily on your 2019 or 2020 average payroll (based on the year being used to calculate the maximum loan amount) or gross revenue for 2.5 months (or 3.5 months for some industries), these loans are up to 100% forgivable—as long as:
- 60% or more of the money is used for employee (or self-employed) compensation;
- Up to 40% is used for qualified business costs, and
- Other rules including wage and employee retention are followed.
While these PPP basics remain generally the same, the program has been expanded to allow more small businesses to take advantage of the loan, to provide more funding to some of the hardest-hit industries, and to make forgiveness easier. Most of these changes apply retroactively to prior PPP loans.
Second draw PPP loans now available
If your business received a PPP loan in 2020 and have already exhausted that funding, you may be able to apply for second PPP loan if:
- Your business has fewer than 300 employees
- You have exhausted all funds obtained from a previous PPP loan. (Forgiveness not required to apply.)
- Your business has experienced a reduction of at least 25% in gross revenue during any quarter in 2020 relative to the same quarter in 2019
- Your business does not have significant ties to China
3.5 months of funds for some industries
For most small businesses, PPP loan amounts are based on average monthly payroll costs (or gross revenue if self-employed)—from an equivalent period of 2.5 months in 2019 or 2020. For seasonal employers, the maximum amount of new PPP loans is based upon 2.5 times the average monthly payroll costs for the 12-week that begins February 15, 2019 or March 1, 2019 and ends February 15th, 2020.
However, acknowledging that some business types like restaurants and hotels may have suffered to an even greater extent during the economic downturn, amounts for new PPP loans can be calculated at 3.5 months if your business in the Food Services or Accommodations industry (businesses with a NAICS code starting with 72).
For seasonal employers, the maximum amount of new PPP loans is based upon 2.5 times the average monthly payroll costs for the 12-week that begins February 15, 2019 or March 1, 2019 and ends February 15th, 2020. The loan can be for up to, but not exceeding, $2 million.
Employee earnings calculations still have a $100,000 annual cap, so gross payroll costs are not to exceed $8,333 per month per worker.
More business types are eligible
As before, first-time PPP loans are available for small businesses with fewer than 500 employees. Also, a small business can only qualify if it has a maximum tangible net worth of under $15 million and the average net income for full 2 fiscal years prior to application does not exceed $5 million. If you are a publicly traded company, you are prohibited from receiving a loan.
With the new law, there are now some exceptions to these special size rules that may still make you eligible:
- If you are in the accommodation and food services sector (NAICS 72), the 500-employee limit is applied on a per physical location basis
- If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply
- Small businesses that have minority shareholders (private equity or venture capital) can still qualify if those shareholders relinquish rights
While most of the usual SBA exclusions of eligible business types remain, the new law expands the categories of businesses who can apply for a PPP loan. For example, the PPP now invites small nonprofits, local newspapers, and TV and radio broadcasters. As long as you meet the SBA size standards mentioned above, you may qualify if you are:
- A sole proprietor, independent contractor, or self-employed
- A Tribal business concern
- A 501(c)(3) organization
- A 501(c)(6) organization
- A 501(c)(19) Veterans organization
- A housing cooperative
- Local news media outlets, including newspaper, radio or TV station
To help improve the equitable distribution of PPP funds, the new law has set aside $35 billion for first time borrowers. Another $15 billion is set aside for employers with 10 or fewer employees or for loans less than $250,000 for entities located in a low-income neighborhood.
Broader, simpler loan forgiveness
The SBA will forgive 100% of the loan as long as you use at least 60% of the money for payroll costs within a period of 8 weeks or 24 weeks—beginning on the day the PPP funds were deposited in your business bank account. To qualify for full forgiveness, the remaining loan funds (up to 40%) must be spent on eligible non-payroll business costs. The changes listed below are retroactive to prior or current PPP loans.
Here’s what’s new when it comes to PPP loan forgiveness:
- You can choose either 8-weeks or 24-weeks as the covered period on which to base your forgiveness calculation (including previous PPP loan recipients). This is useful if you wish to maximize forgiveness based on how long your PPP funds lasted for how long you were able to retain all employees at full pay.
- Simplified application for most borrowers. While forgiveness is not automatic (you have to apply through your PPP lender), the SBA will now provide a simplified one-page forgiveness application if your loan was for less than $150,000.
- EIDL (Economic Injury Disaster Loan) no longer reduces loan forgiveness if you received an EIDL advance from the SBA.
- Tax deductible business expenses. Qualified non-payroll business costs paid for using PPP funds are now tax deductible.
Forgivable “non-payroll costs” may now include:
- Business mortgage interest payments*
- Interest payments on a loan (such as an auto loan) needed to perform your business*
- Business rent and lease payments*
- Business utilities payments*
- Operations expenses for business software and cloud computing services and other human resources and accounting needs that facilitate business operations
- Payments to a supplier for goods that are essential to the operations of the borrower pursuant to a contract or purchase order in effect before the PPP loan is disbursed or with respect to perishable goods
- Worker protection expenditures required to comply with public health guidance related to COVID-19 (such as personal protective equipment, drive-through windows, and sneeze guards
- Property damage costs related to looting due to public disturbances in 2020 that are not covered by insurance or other compensation
*If you are self-employed, you must have claimed a deduction on your 2019 or 2020 taxes for expenses indicated with an asterisk above to be forgiven.
With a fixed interest rate 1%, unforgiven amounts of PPP loans issued before June 5, 2020 are due in two years from the date or origination. If issued after June 5th, 2020, loans are due in five years.
Here are some additional changes to the PPP
The law also provides these new benefits that may apply to your business:
- Employee Retention Tax Credit. Employers can now also receive both the Employee Retention Tax Credit and a PPP loan—as long as they are not used to cover the same payroll expenses. The new refundable tax credit is 70% on $10,000 in wages per quarter (or a maximum $14,000 per employee from January 1, 2021 through June 30, 2021), and eligibility is now expanded to include employers who experienced a decline of more than 20% a quarter compared to the same quarter in 2019. (See the Guide to the ERTC for more information.)
- Group insurance payments can be included in your payroll costs when determining your maximum loan amount
- Seasonal employers now have greater flexibility in picking the 12-week period between February 15, 2019 and February 15, 2020 used to determine your payroll costs and thus your maximum loan amount.
- Gross income (Line 7 on schedule C) will now be accepted by most lenders for PPP loan calculations (effective on March 8, 2021), instead of Line 31 (net income) as previously required.
Disclaimer: This information was prepared for informational purposes only and was considered correct as of December 28, 2020. Fundbox does not provide financial, legal or accounting advice, and this content is not intended to provide (and should not be relied on for) financial, legal or accounting advice. You should consult your own PPP lender or your own financial, legal or accounting advisors before engaging in any transaction.
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