As part of the coronavirus relief package passed by Congress at the end of 2020, the Small Business Administration (SBA) has reopened the PPP to help fund small businesses and sole proprietors or independent contractors who were in operation on February 15, 2020 and were adversely affected by the pandemic. This revised program also includes a “Second Draw” PPP loan for small businesses who have exhausted their initial PPP funding.

This new PPP round offers qualified businesses with potentially forgivable loans up to $2 million at a 1% interest rate, based on average monthly payroll costs (or for sole proprietors, your average net revenue)—from an equivalent period of 2.5 months (or 3.5 months if in the food service or accommodation industry). Existing PPP borrowers may be eligible for additional funding based on additional criteria (see below).

As long as you use the proceeds of the loan under the rules, these loans are 100% forgivable, meaning they can turn into a grant.

You may qualify for a first-time PPP loan if you own a small business with fewer than 500 employees (subject to certain limited exceptions) or are an independent contractor or other sole proprietor. Your business must have been in operation on February 15, 2020. Additionally, the following groups can qualify:

A business that operates an accommodation or food service business (NAICS Code 72) with 500 of fewer employees per location.

A business assigned a franchise operator code by SBA.

A business that receives assistance under the Small Business Investment Act.

If you already had a PPP loan and have already exhausted all of those funds, you may also qualify for second PPP loan if you also meet these criteria:

Your business has fewer than 300 employees.

You have experienced a reduction of at least 25% in gross receipts during the first, second, third, or fourth quarter in 2020 relative to the same quarter in 2019.

Your business does not have significant ties to China.

Assuming you qualify, here’s how you calculate your maximum possible loan value:

Add up all gross annual payroll costs of your US-based employees and independent contractors (before deductions for taxes, employee benefits payments, and similar payments) for 2019 or 2020, depending on which year’s payroll you are using to calculate the maximum loan amount.

Only first time borrowers for PPP loans may use their 2019 or 2020 payroll costs to calculate their maximum loan amount. Subtract compensation over $100,000 paid to employees or independent contractors.

If you are self-employed as a sole proprietor or independent contractor, find Line 31 on your 2019 IRS Form 1040 Schedule C to determine your net revenue. (If the amount on Line 31 is over $100,000, write $100,000.)

Seasonal employers can utilize average monthly payroll costs for any 12-week period between February 15, 2019 and February 15, 2020.

Calculate the average monthly payroll costs by dividing total annual payroll by 12. If you are self-employed, divide your 2019 net revenue by 12.

Multiply the average monthly payroll costs (or your 2019 or 2020 net revenue if you’re self-employed) by 2.5—or 3.5 if your business is in the food service or accommodation industry.

The loan amount may not exceed $2 million.

Remember the 60/40 rule. The SBA may 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 (your choice)—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.

Now all business have a choice of an 8-week or 24-week covered period on which to base your forgiveness calculation (including previous PPP loan recipients).

For both a first-time or second draw PPP, your loan forgiveness can be reduced if—during your 8- or 24-week forgiveness period—you have reduced the number of employees, or reduced employee salaries by more than 25%.

However, there are certain safe harbors that apply that can exempt you from forgiveness penalties, in such situations as an employee refusing to accept an offered position. The new law also provides some more lenient forgiveness details:

Forgiveness is not automatic. You must apply to your lender for forgiveness. However, if your loan was for less than $150,000, the SBA will provide a simplified one-page application process for loan forgiveness.

If you also receive or received an EIDL (Economic Injury Disaster Loan) advance from the SBA, your amount of PPP loan forgiveness will not be reduced by the amount of the EIDL advance.

1. Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee).

2. 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 benefit.

3. State and local taxes assessed on compensation.

4. For a sole proprietor or independent contractor: replacing your compensation (wages, commissions, or net earnings from self-employment, based on your 2019 income and capped at $100,000 on an annualized basis for each employee.

PPP funds may be forgiven if they make up no more than 40% of your total loan amount and are qualifying expenses related to your business during your chosen covered 8 or 24 week period. Such expenses may include these costs (some of which are new and all apply retroactively to previous PPP loans):

1. Business mortgage interest payments*

2. Interest payments on a loan (such as an auto loan) needed to perform your business*

3. Business rent and lease payments*

4. Business utility payments*

5. Operations expenses for business software and cloud computing services and other human resources and accounting needs that facilitate business operations.

6. 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.

7. 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.

8. Property damage costs related to looting due to public disturbances in 2020 that are not covered by insurance or other compensation.

Business expenses paid for using PPP funds are now tax deductible. This applies to past and future PPP loans.

*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.

If any portion or all of your PPP loan is not forgiven, the PPP Flexibility Act has extended the deferral period for borrower payments of principal, interest, and fees on all PPP loans to the date that SBA remits the borrower’s loan forgiveness amount to the lender—or, if you do not apply for loan forgiveness, 10 months after the end of your 8- or 24-week loan forgiveness covered period.

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.