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Now that the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act has passed into law, and there are more Paycheck Protection Program (PPP) funds available to small businesses affected by the coronavirus pandemic, you may be considering applying for a PPP loan. If you decide to go for it, you’ll have plenty of company. Last year, funds from the PPP went to hundreds of thousands of small businesses, and 87% of the loans were for $150,000 or less. Unfortunately, the expired in August, and many who did receive a PPP loan continued to struggle financially due to the ongoing pandemic.The reopened PPP funding is just part of the overall second major stimulus package, which also includes a $600 stimulus check for qualifying Americans, extended COVID-19 unemployment benefits, and a few other measures designed to alleviate some of the pressure on our struggling economy.Initially, only community financial institutions are able to submit applications; the SBA began accepting first draw loan applications from them on Jan. 11, 2021 and second draw loan applications (for eligible companies that already received a PPP loan in the first round) on Jan.13. Small lenders are able to submit applications beginning on Jan. 15, and bigger lenders on Jan. 19. Now that this newest round of PPP funding is becoming available, there are a few tips that can help you with the process of considering your options and applying for funds.
1. Act QuicklyLast time Paycheck Protection Program loans were available, banks were initially slow to open up applications. But after that, the funds were grabbed up quickly, and many businesses that hadn’t moved fast enough didn’t receive loans.This time, banks hopefully know the drill and will likely be faster at processing applications. That means you should get your application in as soon as possible so as to help increase your odds of getting some of the available financing before it’s gone.The last day to apply for and receive a PPP loan is March 31, 2021, if funds last that long. The sooner you get your paperwork together, the faster the application process should go.
2. Get Your Finances Together Before ApplyingSpeaking of paperwork, as part of the Paycheck Protection Program process, you’ll be asked for certain documents, and it’s helpful to have them organized in advance.
Reduced RevenueYou’ll need to provide proof that you have experienced a revenue reduction of at least 25% in 2020 compared to your revenue in 2019. Proof may consist of relevant tax forms or bank statements, quarterly financial statements, or gross receipts comparing one quarter in 2020 to the corresponding quarter in 2019.If you are applying for a loan of more than $150,000, you’ll need to provide this documentation as part of your application. If you’re applying for less than $150,000, you don’t need to submit it when you apply, but you will need to submit it when or before you apply for loan forgiveness.
Payroll CostsYou’ll also be required to calculate your payroll costs. You can use either the 12-month period before the time when you borrow the money or calendar year 2019.The maximum you can borrow for a Second Draw PPP Loan is two and a half month’s worth of your average monthly payroll costs or $2 million, whichever is less. However, if your business is in the Accommodation or Food Services sector and has an NAICS code beginning with 72, you can multiply your average monthly payroll costs by 3.5.Just as with the first round of PPP loans, you’ll need to provide supporting documentation about how you came to the calculation above, such as payroll records, payroll tax filings, Form 1099-MISC, Schedule C or F, bank records, and/or income and expense reports. You may also be required to provide evidence of any retirement and employee group health, life, disability, vision, and dental insurance contributions, if applicable.If you received a loan during the first round and you are applying for more financing through the same lender, you may not be required to provide documentation on payroll costs, assuming they are the same as they were before.
Self-Employment RevenueIf you are self-employed and don’t have employees, you may be asked for your 2019 or 2020 (whichever year you used to calculate your loan amount) Form 1040 Schedule C, 1099-MISC for nonemployee compensation received, invoices, bank statements, or book of record that shows that you have been self-employed since at least February 15, 2020.It may take a while to gather these documents, so start now, before you apply, in order to be organized and ready.
3. Know You Can Apply for a Second DrawIf you received a PPP loan during the first go-round, you may wonder whether you can apply again. The short answer is yes, as long as you qualify.The general qualifications for the Second Draw PPP Loan state you must have 300 or fewer employees in your business, you must have been in operation as of February 15, 2020, and you have experienced a revenue reduction of at least 25% in 2020 from 2019.Beyond that, if you did receive a loan the first time, you must have already used (or be sure that you will use) the full amount that you borrowed on or before the date you expect to receive a second PPP loan.This new round of funding is fully forgivable if you use it for qualifying expenses, so if your business continues to struggle, know that you may be eligible for another round of financing.
4. Find Out if You’re Eligible (Things Have Changed)Perhaps you didn’t apply for a Paycheck Protection Program loan last year because your business hadn’t yet really been hit hard by the pandemic. By now, however, the impact may be much greater.That’s why, even if you didn’t qualify for PPP funds last time, you may qualify now. With a full year of revenues from 2020 to compare to 2019’s, you may indeed find that you've seen a reduction in revenues of 25% or more, which could qualify you.This year’s bill also extends eligibility to businesses that weren’t eligible last time, including newspapers, TV and radio broadcasters, 501(c)(6) nonprofits, hospitals, and housing cooperatives.However, the SBA still has a list of businesses that do not qualify for a PPP loan, including those that:
Finally, businesses that have opened since February 15, 2020, are not eligible for the Paycheck Protection Program.
- Are engaged in political activities or lobbying activities
- Are organized under the laws of the People’s Republic of China or the Special Administrative Region of Hong Kong, or with other specified ties to the People’s Republic of China or the Special Administrative Region of Hong Kong
- Are required to submit a registration statement under section 2 of the Foreign Agents Registration Act of 1938
- Have received a grant for shuttered venue operators under section 324 of the Economic Aid Act
- Are owned, controlled, or held (at least 20%) by the President, Vice President, head of an Executive department, or a Member of Congress, or the spouse of such a person
- Are publicly traded
5. Consider Looking Beyond Your BankMany businesses found it difficult to get PPP loans with the bank they normally used and may have missed out on funds as a result. But there are many lenders beyond traditional banks offering PPP loans, and you don’t need to have an existing relationship with them to apply.Some lenders will open for applications sooner than others, and some will be better equipped to handle the flood of applications they receive. If you did receive a first round of PPP funds, it may be easiest to apply again with the same lender, since it already has your information on record.
6. Be Aware of Forgiveness RulesWhether you’re getting a PPP loan for the first or second time, it will be eligible for forgiveness, as long as it is spent on qualifying expenses. The funds must also be used within 24 weeks of receiving them to qualify for forgiveness, and you must apply for forgiveness within 10 months.In addition to using your PPP funds for payroll expenses (including employer contributions for group health, life, disability, vision, and dental insurance), mortgage or rent, and utilities, you can now also use them to cover cloud computing services you use to maintain business operations, payment processing, supply tracking, or updating records and expenses. Additionally, PPP funds can be used to cover costs you may have had due to looting and vandalism in 2020 that insurance or other compensation didn’t cover. And finally, the new bill also allows for expenses related to protecting employees and customers from coronavirus, such as sneeze guards.If you spend the loan on these expenses, you should be eligible for forgiveness. It can be useful to deposit your loan funds into a separate bank account so you can easily track expenses and then provide proof of what you used the money for once it’s time to apply for loan forgiveness.And know that even if you already received forgiveness for your first PPP loan, you can still take out another PPP loan if eligible, and can be forgiven for that one as well.
7. Know the Tax ImpactAnother silver lining with the Paycheck Protection Program is that as the CARES Act specifically states, forgiven loans are not considered taxable income by the IRS. taxed. So when it’s time to file your 2020 (or 2021) taxes, you don’t have to claim the loan proceeds as part of your gross receipts.What’s more, with the passage of the new bill, you can claim the expenses covered by the forgiven loan as deductions. Previously, there was a disagreement between lawmakers and the IRS about whether you could, and now Congress has written it into law that otherwise deductible business expenses that were covered by a forgiven PPP loan are indeed deductible. Things have changed since the Paycheck Protection Program launched. As a business owner, you know you need to do whatever you can to ensure your business’ financial security, and the more knowledgeable you are about the PPP, the more you may be able to benefit from it and, ideally, get full forgiveness on your loan, if you’re eligible to take one out.As of Jan. 15, PPP loan applications via Lantern can be submitted to the SBA. Get started.
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About the Author
Susan Guillory is the President of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.