Why was the Paycheck Protection Program (PPP) loan created?
The Paycheck Protection Program (PPP) was created by the CARES Act to provide forgivable loans to eligible small businesses to keep American workers on the payroll during the COVID-19 pandemic.
PPP loans draw one and two.
The First Draw PPP started on March 2020 and has been extended multiple times.
On January 6, 2021, the Small Business Administration (the “SBA”) and the Department of Treasury released an Interim Final Rule called “Business Loan Program Temporary Changes; Paycheck Protection Second Draw Loans” (2nd PPP loan).
On March 30, 2021, the President signed the PPP Extension Act of 2021 (the “Extension Act”). Under the Extension Act, the last day for lenders to submit applications for Second Draw PPP Loans is May 31, 2021, and, the SBA will have an additional 30 days to process the applications submitted before June 1, 2021.
However, even with this latest extension, the SBA may not accept new lender applications for first draw or second draw ppp loans submitted after May 31, so it’s better to apply as soon as possible.
Who qualifies for a PPP loan?
Any small business with 500 or fewer employees may be eligible. This includes small businesses, S corporations, C corporations, LLCs, private nonprofits, faith-based organizations, tribal groups, and veteran groups.
How much are the draws for PPP one and two?
The maximum amount of money you can borrow as a first-time PPP borrower is 2.5 times your average monthly payroll costs, up to a maximum of $10 million. That means, for example, if your average monthly payroll in the last 12 months was $100,000, you could borrow up to $250,000.
For the 2nd draw the sum of the total monthly payroll costs paid or incurred as of the date on which you apply for the second draw PPP loan, divided by the number of months in which those payroll costs were paid or incurred, multiplied by 2.5 (borrowers with an NAICS beginning with 72 will multiply by 3.5.
Can you get two PPP loans at the same time?
You cannot apply for a second draw loan until receiving the first draw loan, and either spending it all or creating a plan for how you will spend it and documenting that plan. To qualify for a second draw loan, you will need to spend the entire first draw loan on eligible expenses, such as payroll and utilities.
What are the requirements for the 2nd PPP loan?
You are generally eligible for a Second Draw PPP loan if you:
- Previously received a First Draw PPP loan and will or has used the full amount only for authorized uses.
- Have no more than 300 employees; and.
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020,, or an overall 50% reduction for the year.
What are the 2nd PPP loan terms and conditions?
Second Draw PPP Loans are generally subject to the same terms, conditions, and requirements as First Draw PPP Loans. These include the following:
- The SBA will guarantee 100% of the Second Draw PPP Loan.
- No collateral will be required.
- No personal guarantees will be required.
- The interest rate will be 100 basis points (1%), calculated on a non-compounding, non-adjustable basis.
- The maturity is five years.
- All loans will be processed by lenders under delegated authority and lenders will be permitted to rely on certifications of the borrower to determine the borrower’s eligibility and use of loan proceeds.
How long will the PPP second round last?
The loans for the second round of PPP forgiveness are up to $2 million (as opposed to the maximum of $10 million in the first round), and during the forgiveness process, you may choose a covered period between eight to 24 weeks.
PPP loan forgiveness rules
For a PPP loan to be completely forgiven, you will have used the funds on specific expenses. 60 percent of the loan must be used to fund payroll and employee benefit costs. The remaining 40 percent can be spent on the following non-payroll costs: mortgage interest payments, rent and lease payments, and utility payments.
Is there a deadline to apply for PPP loan forgiveness?
There is no deadline to apply for PPP loan forgiveness. All PPP loans have a covered period of 8 to 24 weeks after the funds hit your bank account. Once that covered period ends, your loan payments are deferred for 10 months.
How long does the SBA have to approve PPP loan forgiveness?
Once a lender reviews a forgiveness application and submits it, the SBA has up to 90 days to make a final decision. To date, most applicants have in fact received answers on forgiveness within the 90-day timeframe.
What documents are needed for PPP loan forgiveness?
To apply for PPP loan forgiveness, use the SBA’s Loan Forgiveness Application form, Form 3508, or your lender’s equivalent form. You might be able to use Form 3508EZ or Form 3508S if you meet the eligibility guidelines. After completing the form and attaching any necessary documents, submit it to your lender.
Other required documents will depend on what expenses you covered with your PPP funds. However, there are some documents and information requirements that are universal:
- Bank account statements.
- Photo ID (e.g. driver’s license, passport)
- Your SBA loan number (can be found on your Promissory Note)
Owner compensation replacement
To prove owner compensation replacement payments, you’ll need to provide:
- 2019 Schedule C (or January to February 2020) for sole proprietors
- 2019 1099-MISC forms (or January to February 2020) for independent contractors
- 2019 Schedule K-1 (or January to February 2020) for partnerships
- Check images, OR annotated bank statement
Payroll costs
To prove payroll costs you’ll need to provide:
- Payroll service reports documenting wages paid to employees
- Federal payroll tax filings (IRS Form 941)
- Income, payroll, and unemployment insurance filings from your state
- Receipts for employer contributions to group benefit plans
- Receipts for any retirement plan contributions
Mortgage interest payments
To prove mortgage interest payments you’ll need to provide:
- Mortgage amortization table, or mortgage account statements
- Payment receipts, OR annotated bank statements
Rent/lease payments
To prove rent/lease payments you’ll need to provide:
- Rent/lease agreement
- Monthly payment statements
- Payment receipts, OR annotated bank statements
Utility payments
To prove utility payments you’ll need to provide:
- Monthly utility statements
- Payment receipts, OR annotated bank statements
Operation Expenditures
To prove operation expenditures you’ll need to provide:
- Copy of invoices, orders, or purchase orders paid during the Covered Period
- Receipts, canceled checks, OR account statements verifying those eligible payments
Property Damage Costs
To prove property damage costs you’ll need to provide:
- Copy of invoices, orders, or purchase orders paid
- Receipts, canceled checks, or account statements
- Documentation that the costs were related to property damage and vandalism or looting due to public disturbances that occurred during 2020 and were not covered by insurance. For example, correspondence with your insurance provider denying a claim should suffice.
Supplier Costs
Your PPP loan can cover costs related to the supply of goods so long as they meet the following conditions:
- The purchase is essential to the operations of the borrower at the time at which the expenditure is made; and
- The purchase is made pursuant to a contract, order, or purchase order:
- In effect at any time before the covered period; or
- With respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan
To prove supplier cost you’ll need to provide:
- Copy of contracts, orders, or purchase orders in effect at any time previous to the loan cover period (except for perishable goods)
- Copy of invoices, orders, or purchase orders and receipts, canceled checks, or account statements
Worker Protection Expenditures
If your business needed to purchase protective equipment or improve your business to remind COVID compliant, you can use your PPP loan to cover these costs. Expenditures may include:
- The purchase, maintenance, or renovation of assets that create or expand (drive-through window; air pressure ventilation; physical barrier; health screening)
- The purchase of protection materials, facepiece respirators, and other kinds of personal protective equipment
To prove worker protection expenditures you’ll need to provide:
- Copy of invoices, orders, or purchase orders
- Receipts, canceled checks, or account statements verifying those eligible payments
- Documentation that the expenditures were used by the Borrower to comply with applicable COVID-19 guidance during the Covered Period
How does the Employee Retention Credit (ERC) impact PPP Forgiveness?
Prior to the passage of the Relief Act in late December 2020, an employer that received a PPP loan could not claim the Employee Retention Credit (ERC). The Relief Act changed this rule retroactively so now employers that received a PPP loan in 2020 may claim the ERC for qualified wages paid after March 12, 2020, and before January 1, 2021, if they are otherwise eligible for the credit.
An employer, however, cannot claim the ERC on wages it uses to receive PPP loan forgiveness. This double-dipping is prevented because an eligible employer is deemed to make an election not to consider qualified wages reported on the employer’s PPP Loan Forgiveness Application for purposes of claiming the ERC.
Before filing your loan forgiveness application, you should evaluate which payroll costs should be included in the loan forgiveness applications to maximize the benefits of the ERC and loan forgiveness. PPP borrowers should carefully evaluate and calculate which qualified wages should be included as payroll costs on the loan forgiveness application in order to maximize the ERC, if the borrower meets the other ERC requirements.