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Many American businesses have taken a hit during the pandemic, and while there have been resources put in place to help, arguably one of the most impactful is the Payroll Protection Program (aka PPP Loans) made available in summer 2020 and winter 2021. But as the newest round of PPP Loans becomes available, there are a lot of questions about qualifications, payout and process. Here’s what you need to know about the second round of PPP Loans.
What is the PPP Loan?
The Payroll Protection Program is a governmental program designed to help keep Americans employed during the pandemic and was first introduced in summer of 2020 as part of a larger overall coronavirus bill (the CARES Act) rolled out by Congress. Backed by the Small Business Administration, the loans may be used for payroll, operating expenses, rent and utilities, and COVID worker protections.
How is the PPP Round 2 different from Round 1?
The fundamental difference between Round 2 of the PPP and Round 1 is that Round 2 is only available to those entities or companies who received a first-round loan through the program and used that amount for approved expenditures. Additionally, the company must have fewer than 300 employees and be able to demonstrate a 25 percent reduction in gross receipts for either 1) the entire year 2020 over 2019; or 2) any given quarter within 2020, over the same quarter in 2019.
If a company never received a first round PPP Loan and is interested in pursuing one, there is still a path forward; they must simply apply for a first round loan instead. However, the criteria is slightly different: they must have 500 or fewer employees, as per the SBA size requirements, and sole proprietors, self-employed persons, and independent contractors are also eligible.
Both the PPP Rounds 1 and 2 loans can be applied for through March 31, 2021.
How much is a PPP Loan worth?
Generally, a PPP loan is based on what you have spent in the past on payroll costs for you and your employees. In the case of a sole proprietor, your salary is directly related to your net profit.
For either round, a PPP Loan should pay out the lesser of either $2 million dollars, or 2.5 times the borrower's average monthly payroll costs. (To calculate the average, take your annual payroll costs as outlined in your Schedule C or 2020 or 2019 tax return, and divide by 12.) Payroll costs aren’t just salaries, however. Also included in the formula are:
- Salary and wages, including commissions, tips, bonuses, and hazard pay (with a cap of $100,000 annually, per employee)
- Employee benefits, including leave and paid time off, health insurance premiums, and retirement benefits
- State and local taxes
How can I apply for a PPP loan?
While early applications for the first round of PPP loans were chaotic at best, the last nine months have helped everyone establish the appropriate processes required to make it run far more efficiently. In order to apply for a PPP loan, there are a few things you’ll need to do.
1. Find a lender.
If you’re applying for a second round of funding through PPP, it’s best to go back to the lender who did your original loan application. However, if it’s your first round, the only criteria is to find a lender qualified through the SBA who can file your loan and help you get approved. Additionally, your lender is the one who will take your application for forgiveness once you have received your loan, so you’ll want to make sure you keep a close relationship with them.
2. Gather the necessary paperwork.
In order to apply, you will need to fill out the form; make sure you get the right one according to which round of funding you are applying for. (You can find the form for Round 1 and Round 2 online). In addition to that, you will also need the following:
- Proof of payroll or income. This can be different depending on the type of business, but in general, will follow these basic outlines:
- Independent contractors or sole proprietors will need either a 2019 or 2020 Schedule C, or a 1099 form showing your income for the year.
- Sole proprietors with employees will need all of the above, plus Form 940 (or four quarterly Form 941s) as well as State wage unemployment insurance tax reporting forms for each quarter.
- For corporations or LLCs filing as such, you will need to add in Form 1120 or Form 1120-S tax return to substantiate health insurance or retirement benefits to employees.
- For partnerships (or LLCs filing as such), you will need to add a 1065 tax return (including K1’s) to substantiate health insurance or retirement benefits to employees, and self-employment earnings for the partners.
- Non-profits will also need to show Form 990 showing health insurance and/or retirement plan benefits to employees, as well as a parsonage report (if applicable).
- Proof of revenue reduction. If you’re going for a PPP Round 2 loan, you’ll need to provide one of the following information, in addition to the documentation listed above:
- 2019 and 2020 tax forms (IRS Form 1040 Schedule Cs).
- 2019 and 2020 quarterly income statements (for the same quarter for 2019 and 2020)
- If the business started between 1/1/2020-2/15/2020, quarterly income statements or bank statements for Q2, Q3, or Q4 compared to Q1.
- 2019 and 2020 bank statements (for the same quarter for 2019 and 2020).
- Current government-issued ID. If you are an owner of more than 20% of the business, you will need to provide a copy of your driver’s license or passport.
- Voided check or bank deposit information. Most of this information can be provided electronically, but your lender may require a voided check to have your bank account and deposit information on file.
3. Apply.
Depending on your lender, the application process may differ, but in general, you’ll simply take all of your gathered information and upload them to a secure portal for review.
4. Keep records.
Should you be awarded a loan, you’ll want to keep detailed records on when it came in, and where you spent it (or where it was allocated to). Not only will these records serve you well in future tax years, but should you choose to apply for loan forgiveness, you will need all of this information at the ready.
Will my PPP loan be forgiven?
One of the biggest benefits of the PPP loans for small businesses and employers is that, for many, the loan may be completely forgiven, meaning that it will not be required to pay back to the government or the SBA.
In order to have your loan forgiven, you must use the money for designated expenses over the 24 weeks following loan disbursement. Designated expenses include:
- Payroll
- Mortgage interest
- Rent or lease payments
- Utilities
It is important to realize, however, that while payroll is forgivable at 100%, only 40 percent of your PPP loan may be used for other designated and approved expenses as outlined above.
Additionally, there are two criteria that must be met in order to get the full amount forgiven.
- Your employee count cannot decline from 2019 monthly averages (or the past 12 months). If you’ve already let employees go, you have through the end of the year (December 31) to restaff, the only exception being if you can’t rehire those you let go and cannot find qualified replacements.
- You cannot cut salaries or wages. All wages must be paid at the same levels; if they are not, the amount of forgiveness may be reduced.
Get an Advisor on your side
Should you choose to apply for a PPP loan—whether it is your first round or a second—keep in mind that your best option is to find a financial advisor or accounting professional who can help guide you through the process. As with many other government programs, change can come at any time, and not knowing these changes can sometimes have significant consequences.
As always, if we at Spero Financial can help in any way—whether that means opening a new business account or putting you in touch with an SBA lender, please don’t hesitate to let us know. Our member representatives are available and here for you, no matter what your business future looks like.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual.
