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After months of negotiations, the $900 billion pandemic stimulus package bill was passed into law on Dec. 27. The new law provides another round of funding--$284 billion--to the Paycheck Protection Program (PPP), a key small-business relief program that closed in August.The fresh injection of cash for eligible small businesses across the country will offer an important lifeline to those struggling to stay afloat. Due to the business interruptions caused by the Covid-19 pandemic, an estimated 100,000 businesses had permanently closed by the end of August.Created by the CARES Act in the spring of 2020, the PPP has been heavily criticized. One major issue was the fact that it awarded a significant portion of the funds to big companies. Other flaws included inflexibility when it came to the use of loans, confusing terms for forgiveness, and an overall lack of transparency. Over the past year, lawmakers have amended the rules through a number of acts, and the latest bill tries to correct more problems. Jan. 14 update: the PPP reopened for first-time borrowers on Jan. 11 and for second-time borrowers on Jan. 13 initially to community financial institutions and other lenders that help the underserved. It will open to small lenders on Jan. 15 and all other lenders on Jan. 19. The SBA has provided updated guidelines for the program’s latest round.
Who’s Eligible for Latest PPP?
First-Time BorrowersFor first-time borrowers--those who didn’t get a loan from the first two rounds of PPP--the rules for who’s eligible are essentially the same. However, the types of businesses that can qualify for PPP loans have been expanded.Out of the $284 billion available in loans, $35 billion is earmarked specifically for first-time borrowers who have a maximum of 500 employees. Another $15 billion is set aside for businesses with a maximum of 10 employees or for loans less than $250,000 to those that operate in low-or-moderate income neighborhoods.Here are some of the key guidelines:
The new bill sets aside $15 billion specifically for cultural institutions, such as live venues and independent movie theaters. Known as the “Shuttered Venue Operator Grant,” this program is separate from the PPP. Those who receive a Shuttered Venue grant from the SBA are ineligible for a PPP loan.Separately, the latest guidelines specify that an organization will be ineligible if the U.S. president, vice president, head of an executive department, or member of Congress, or the spouse of such person holds a controlling interest in the business.
- Business had to have been in operation on Feb. 15, 2020 or earlier.
- Employer can have a maximum of 500 employees.
- The applicant can be independent contractor, self-employed individual, or sole proprietor.
- Tax-exempt nonprofits are now eligible.
- Housing cooperatives or destination marketing organizations with no more than 300 employees are now eligible.
- News organizations with no more than 500 employees per location are now eligible.
Second-Time BorrowersThose who borrowed from the PPP in one of the earlier rounds can qualify for another loan. The SBA’s guidelines released on Jan. 6 provided greater detail on “second draw loans” from the PPP. Similar to the provisions for first-time borrowers, $25 billion has been set aside for businesses with a maximum of 10 employees or for loans less than $250,000 to businesses that operate in low- or moderate-income neighborhoods.Meanwhile, the SBA rules narrowed the businesses that can participate in second draw loans. Here are highlights of the terms:
- The employer can have no more than 300 employees.
- The business has to have used up all funding from first loan on eligible expenses by the disbursement date of the second loan.
- Applicants must now show that gross receipts from any quarter in 2020 were 25% less than the gross receipts in the same quarter in 2019. For businesses that were in operation all four quarters, a reduction in annual receipts of 25% or greater in 2020 versus 2019 also qualifies
Minority, Under-served, Veteran and Women-Owned BusinessesSmall businesses owned by minorities may have had difficulty obtaining PPP loans even if they would have qualified, research has shown. The new bill tries to address this problem by allocating $15 billion for first-time and second-time borrowers who are borrowing from community financial institutions. Another $15 billion is reserved for loans made by insured depository institutions, credit unions and farm credit system institutions with assets less than $10 billion. In addition, the PPP will reopen first to community financial institutions. For first-time borrowers, that date is Jan. 11 and for second-time borrowers, Jan. 13. The program will open after those dates to other lenders.
How Much Can You Borrow From PPP?For first-time borrowers, the maximum amount that a business can borrow is 2.5 times their monthly payroll, after excluding compensation paid to employees in excess of $100,000 annually or more. These figures must be from the calendar years of 2019 or 2020. In an important new rule, qualifying hotels and restaurants--an industry that’s been particularly hard hit by the pandemic--can borrow up to 3.5 times their monthly payroll. As with earlier rounds for PPP, the maximum amount that can be borrowed for first-timers is $10 million. Meanwhile, for second-time borrowers, the cap is $2 million. According to the SBA website, here’s a step-by-step guide on how to calculate the maximum amount your small business may be eligible to receive:
- Add up payroll costs from 2019 or 2020
- Subtract any compensation paid to an employee in excess of $100,000 on an annual basis
- Divide this total by 12 to calculate the average monthly payroll costs
- Multiply the average monthly payroll costs by 2.5 (or 3.5 for qualifying hotels and restaurants)
- Add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020 and April 3, 2020 that a borrower seeks to refinance, not including any amount that’s an “advance.”
How Can PPP Funds Be Used?As with the initial rounds of PPP, funds can be used for payroll costs, health-care and other benefits, rent and leasing, utilities, qualifying mortgage interest expenses, as well as interest on any debt obligations that were incurred before Feb. 15, 2020. This latest round of PPP also expanded the list of permitted uses:
Another change pertains to the coverage period, or the amount of time the business has to use loan funds in order to be eligible for forgiveness. Originally, the coverage period was eight weeks, although it was later amended to 24 weeks. In the latest round of the PPP, borrowers can choose the length of coverage as long as it falls between eight weeks and 24 weeks.
- Payments for any business or cloud computing software that facilitate operations
- Costs related to property damage, including damage from looting and vandalism that occurred during 2020 if insurance or other compensation was insufficient.
- Expenses related to worker protection from the coronavirus pandemic. These include renovations of a drive-through window facility, air ventilation or filtration system, physical barriers such as sneeze guards, expansion of outdoor space, and health-screening capabilities.
Will PPP Loans Be Forgiven?In order for loans to be forgiven, borrowers are still required to spend at least 60% of the funds on payroll, while the remaining 40% may be used on eligible costs. However, the new bill provides a simplified forgiveness process for PPP loans under $150,000. Such borrowers need to complete a one-page certification attesting they complied with program requirements. This includes providing the number of employees the borrower was able to keep on payroll because of the loan.
Will PPP Funding Be Taxed?This latest round of the PPP includes updated tax treatment conditions. Loans originated through the program that are forgiven will not be categorized as taxable income and expenses paid with PPP proceeds are now tax-deductible. This means PPP borrowers can deduct the costs of payroll and other expenses covered by the loans, even while the forgiven loans themselves are also tax-free income. This reverses previous guidance from the Treasury and covers both new and existing loans.
How to Apply For PPP?The deadline to receive a PPP loan from this latest round of funding is March 31, 2021. Lantern has compiled a list of online or non-bank lenders, who offer speed and convenience when it comes to lending: PPP Online Lender ListThe list also includes fintech companies, such as Lantern, that are partnering with lenders to facilitate PPP loans.It’s important to check the guidelines on SBA loans, as well as consult with professionals, especially for matters related to taxes. PPP loan applications via Lantern can be submitted to the SBA as of Jan. 15, 2021. Get started here.
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About the Author
Inyoung Hwang is a financial journalist whose writing has appeared in The Wall Street Journal and Bloomberg News. She lives in New York and currently serves as an investment writer for SoFi.