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The Paycheck Protection Program, or PPP, is a federal loan program aimed at helping small businesses keep their employees on their payroll through cash-flow assistance.
While you can be eligible for up to $10 million, 60% of the amount you'll get must go towards paying your employee payroll and benefits across a 24-week period, which sets a limit on the total amount you'll be loaned. Meet the requirements, though, and you won't have to pay it back.
It's a coronavirus pandemic response, and just as the pandemic has dragged on longer than many thought at first, the PPP has been through a series of updates and deadline extensions. It can all get a little confusing, particularly for the harried small business owners that it's supposed to be helping, so this article will break down all the deadlines, requirements, and applications to know about.
The current deadline is May 31, 2021 — although another extension wouldn't be a shock. Here's our guide to what the PPP does and if you qualify to benefit.
On this page:
- How Does the PPP Work? – The Complete Process
- Paycheck Protection Program Application Process
- Key Takeaways
How Does the PPP Work? – The Complete Process
The Paycheck Protection Program gives eligible businesses a 24-week loan to cover their payroll and expenses. Once the period is up, the businesses can file a loan forgiveness application and, if the requirements are met, can cancel some or all of their debt. Any loan not forgiven can be paid back after a loan maturity period of five years, with a 1% interest rate beginning from when the loan was received.
With some exceptions, businesses must have 500 or fewer employees to be eligible, and all loans are capped at $10 million. At least 60% of the loan must be used to fund payroll and employee benefits costs, with the remaining 40% or less available for additional expenses: Rent, utilities, and interest payments on debt or mortgage from prior to Feb 25, 2020.
The loans themselves might be called “SBA 7(a) loans,” the designation for the SBA’s loan guarantee program, which includes the PPP loans although it's not limited to them. Other terms might be used, like payroll protection program or loan forgiveness, but they all refer to the same thing, which this article will just call the Paycheck Protection Program, or PPP.
Here's a quick timeline of the bills and extensions related to the PPP:
- March 27, 2020 — The Coronavirus Aid, Relief, and Economic Security (CARES) Act passes, opening up the Paycheck Protection Program (PPP) through the Small Business Administration (SBA).
- June 5, 2020 — The PPP Flexibility Act of 2020 is enacted, extending the covered period to 24 weeks.
- December 27, 2020 — The Consolidated Appropriations Act 2021 goes into effect, adding the second draw PPP loan for businesses still struggling after their first PPP loan.
- March 11, 2021 — The American Rescue Plan Act further revises details of the PPP.
- March 30, 2021 — The PPP Extension Act extends the PPP application deadline by two months, to May 31, 2021.
For clarity, we cut out a few additional extensions: The initial deadline was actually June 2020, but all you need to know is that the current deadline is May 31, 2021.
Qualifying for a PPP loan – Am I Eligible?
There are four main considerations that can help your business determine its eligibility for both the first and the second draw PPP.
First, your business must have been in operation since February 15, 2020. If you officially started the business after that date, you're not in the program's target audience of businesses that were around before the coronavius pandemic began.
Second, you'll need to actually be a small business. Specifically, first draw PP makes businesses with fewer than 500 employees eligible for up $10 million in loans, designated to cover payroll and other expenses. “Fewer than 500 employees” covers a lot: Sole proprietorships, self-employed workers, and independent contractors. Private non-profits and 501(c)(19) veterans organizations are included as well. The amount is capped at 2.5 times the business's average monthly payroll cost.
There's an additional qualifying factor: If your operation's primary business activity is in the food service or hospitality industries, the 500-employee limit only applies per location. To figure out if that applies to your business, head over to the US Census website's NAICS search form and search a keyword to see what NAICS code applies to your business. NAICS 72 is the code that qualifies your location.
Third, you'll need to know which businesses within those qualifications are excluded for other reasons. Your affiliation could be one excluding factor: If a small business is controlled by a larger entity, like a parent company, then the 500-employee limit applies to that larger entity instead of the smaller business. Real estate is the classic example, but affiliation can also disqualify companies funded by private equity or venture capital.
Plenty of specific industries don't qualify, either. PPP application is denied to: investing companies, including banks; political and policy lobbyists; passive businesses, which don't manage their own operations, like landlords; those employing household workers, like nannies; businesses connected to gambling, marijuana, or religion; multi-level marketers; or a business that is 20% or more owned by someone who is neither a US citizen or a lawful permanent resident or who was convicted of a felony within the past five years.
Fourth and finally are second draw PP loans: Eligibility restrictions are a little tighter, with applications open to businesses with fewer than 300 employees who have already used their first draw PPP loan, and who can prove a 25% loss in revenue between 2019 and 2020. (If your business was started in 2020 but was operational before the February 15, 2020 cutoff, you won't have gross receipts from 2019 and can instead use Q1 2020 as your comparison period, as long as you can show a 25% between Q1 and Q2, Q3, or Q4 of 2020.) The total funds per business are capped at $2 million, down from $10 million for first draw PPP.
To sum up:
- Do be in operation since February 15, 2020
- Do have fewer than 500 employees across the business (or per location, if in food service or hospitality)
- Don't be on the list of excluded industries
If your business meets those standards, it is currently available for a first draw PPP loan. If you've already used that first draw loan, then a second set of restrictions stands between you and the second draw loan:
- Do have fewer than 300 employees
- Do be able to prove a 25% loss in revenue between 2019 and 2020
Paycheck Protection Program Application Process
The SBA doesn’t lend PPP money directly. Instead, they back the loan that an approved lender provides. Businesses can check out the SBA’s Lender Match tool to find an eligible SBA 7(a) lender.
You'll start the process by submitting your PPP application to your local approved lender. They'll then review it and pass it on to the SBA, which might perform a fraud prevention check. If they pass it, your application will receive an SBA loan number which confirms your loan funds are reserved. Once this number is issued, your lender will have a ten-day period in which to underwrite and disburse funds to your business.
The terms of the loans are lenient: Borrowers won't need to offer personal guarantee or collateral; the SBA 100% guarantees the loan; and borrower fees or prepayment penalties are allowed.
One of the impacts of the June 2020 PPP Flexibility Act was to extend the two-year loan maturity period to a five-year period. If your PPP loan was made after June 5, 2020, you'll have five years before you need to start paying it back.
However, you'll likely want to have some or all of it forgiven instead, and for that, you'll need to submit your loan forgiveness application within ten months of your loan period ending. To do that, you'll first need to figure out which of three possible loan forgiveness applications to use:
- Full form — Most businesses will use this one.
- EZ form — This is for the self-employed or those with a low employee number or salaries.
- Form 3508S — This is a simplified form, used only for those with loans of $50,000 or less
Then, you'll want to identify the loan you need — first draw PPP or second draw PPP. For the application, a business will need to verify the economic situation that makes the loan a necessity, and that the loan funds will be used to retain employees and maintain payroll.
For all these cases, balanced books and clear accounting will go a long way. But which documents exactly will you need?
Documentation Required to Apply for a PPP loan
The most important internal documentation is anything related to past and future payroll expenses. This includes:
- Payroll processing records
- Tax filings (forms 941, 940 and W-3)
- Business TIN number
- Headcount over time
- Information on all less than 20 stakeholders
If you're a self-employed worker, you can apply using your gross income if you have filed a Schedule C with your 2019 Form 1040 tax return.
The PPP application form will lay out what information is required, and you can further speed up the data collection process with the right payroll software. Here's what each top accounting solution will do to help you:
- Quickbooks Online Payroll produces reports with the information needed to complete the application form.
- Sage 50cloud offers a free stand-alone PPP loan forgiveness tool.
- ADP RUN produces reports.
- iSolved produces reports.
- Gusto produces reports.
- Square Payroll produces reports.
- Paychex Flex gives users access to a ‘PPP Loan Forgiveness Estimator' and, yes, also produces PPP reports.
In all these cases, functionality is limited to running a special analytics report that gives the user the required data for the application. They don't file the application on behalf of the users, as they do for tax forms.
Complying with Loan Requirements
If your business is eligible for the PPP loan, you'll need to put 60% or more towards payroll costs over the 24 weeks the loan applies to, you'll need to use 40% or less towards a set list of other expenses, and you'll need to steer clear of a few additional restrictions as well. We have a bulletpoint list for each.
Payroll costs might include:
- Employee salaries, including commissions, bonuses and hazard pay
- Employer-paid benefits like group health, insurance premiums, and retirement contributions
- Employer assessed state and local taxes on compensation
- Equivalent compensation for owner-employees and the self-employed — since they don't draw a salary, this compensation for a 24-week period is 2.5 months' of their 2019 net profit, capped at $20,833. They'll need to have their 2019 Schedule C to be eligible, as this is how 2019 net profit is determined.
Additional expenses can include:
- Rent, if under a lease established prior to Feb 25, 2020.
- Utilities, if service began prior to Feb 25, 2020.
- Interest payments on mortgage from prior to Feb 25, 2020.
- Interest payments on debt from prior to Feb 25, 2020.
Additional loan restrictions include:
- A $100,000 salary cap per employee — notably, this is pro-rated, so in real terms, the loan will cover a max of $46,154 per employee per 24-week period.
- Employees' principle place of residence must be within the US.
- Family or sick leave under the Families First Coronavirus Response Act will not be covered.
In the 24 weeks following the load signing date, all expenses (60% towards employee payroll and 40% towards eligible items) can be “forgiven.” All expense records during this period must be kept and bookkeeping must be accurate.
After the loan period ends or when PPP funds are spent, businesses can apply for forgiveness though their lender of choice, which must be the same lender they received the loan through. Once the lender receives the application they have 60 days to make a decision. Decision will be based on the borrower meeting the requirements:
- 60% or more spent on payroll expenses
- All documented employees retained — if they haven't been, you won't lose all loan forgiveness, but there will be a set reduction per lost employee
- No wages reduced by more than 25%
The decision is made by the third-party lender, so be sure to meet with them to go over their documentation requirements. Some lenders may allow a business to file its loan forgiveness application even before the loan period is up, while others may not.
The QuickBooks PPP loan report template can be found in the “reports” dropdown menu.
The Paycheck Protection Program is designed to help small businesses keep their employees on payroll during a tough time. Every step of the process is full of restrictions or exceptions, making it tough to navigate.
Hopefully this article has helped you understand the broad strokes behind how it all works and how it can help you. Here's a quick five-point summary of the process.
- Determine your eligibility — You'll need to have fewer than 500 employees to apply, and the funds will be capped at 2.5 times your business's average payroll cost per month.
- Find your lender — This is the first step to get a PPP loan. Find a local lender and submit your application through them.
- Spend it wisely — 60% or more goes toward employee salary, benefits, and related taxes, while the other 40% could go toward rent, utilities, and interest payments on debt or mortgage.
- Document everything — In some cases you'll need to compare your spending to data on your 2019 or Q1 2020 tax returns, and in all cases you'll need to confirm that your funds were spent appropriately.
- Submit a loan forgiveness application — You'll need to submit another application to your lender within ten days of your covered period ending, using all that documentation to reduce or entirely forgive your loan.
As you move through the process, be sure to discuss these steps with your lender — it's in their interests to help make the process as clear as possible to you as well.
As of December 2021, more than $284 billion has been earmarked for PPP loans, so there's plenty to go around. Find a local lender today and submit your application for a chance at getting a little of it for yourself.
The remaining 40% or less of the loan can go towards additional expenses: Rent, utilities, and interest payments on mortgage or debt, although all of these extra expenses must have been established prior to Feb 25, 2020 to be eligible for the loan funds.
If you've already received your loan, you'll have a 24-week period during which to use it, followed by another deadline to file your loan forgiveness application. The forgiveness application deadline is ten days after your 24-week period ends.
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