What Is The Paycheck Protection Program? (A Simple Guide)

The US federal government signed a new measure into law on December 27, 2020. This law includes a second stimulus package for companies and a boost to the Paycheck Protection Program (PPP).

Here's all you need to know about applying for a first-draw PPP loan or a second-draw PPP loan.

What Is The Paycheck Protection Program, How Does It Work?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Paycheck Protection Program, a lending program. Initially, a $350-billion initiative aimed at providing eight weeks of cash flow support to American small companies with 100% government-guaranteed loans. The Small Business Administration backs the loans (SBA).

In late April, the Paycheck Protection Program and Health Care Enhancement Act added an extra $310 billion in financing to the program. In addition, the Paycheck Protection Program Flexibility Act made significant modifications to the program, enabling more resources to devote cash and making it simpler to get debt forgiven completely.

A second subsidy was enacted on December 27, 2020, adding $285 billion to the program. They were revising the list of qualifying spending. It also made available a second PPP loan to firms that had exhausted their previous PPP loan.

Highlights Of The PPP Loan

The following is a moderate summary of the PPP loan program:

•    Small companies of all sizes are eligible.

•    The loan has a two-year maturity period and a one-percent interest rate.

•    Loans taken after June 5, 2020, have a five-year term.

•    The loan distribution date, the loan covers costs for 24 weeks.

•    There is no need to make loan payments until either your forgiveness application is approved or your 24-week covered period finishes, which is ten months.

•    There is no need for collateral or personal guarantees.

•    There are no charges.

•    The debt can be forgiven, thereby converting it into a non-taxable gift.

Am I An Eligible Candidate?

Loans from the Paycheck Protection Program have a broader reach than SBA catastrophe loans. Small companies, single proprietorships, self-employed people, and independent contractors are all eligible.

•    Sole proprietorships must submit a Schedule C from their tax return filed (or to be filed) that shows the sole proprietorship's net earnings.

•    In addition to their Schedule C, independent contractors will be required to file Form 1099-MISC (now 1099-NEC in 2020).

•    Self-employed people would have to file payroll tax returns with the Internal Revenue.

In 2021, it added a necessary condition to draw PPP loans second. Businesses who want to apply for their second PPP loan must show a revenue drop of 25% or more. Comparing revenue from any quarter in 2020 to the same period in 2019 will demonstrate this one.

What Can You Do With A PPP Loan?

Payroll and employee benefit expenditures must account for at least 60% of the PPP loan. can spend the remaining 40% on the following:

•    Interest payments on a mortgage

•    Payments for rent and leases

•    Utilities

•    Expenses related to operations, such as software and accounting requirements (like Bookkeeping pro services)

•    Property damage expenses not covered by insurance due to public disruptions

•    Costs incurred by suppliers, such as cost of products sold

•    COVID-compliant worker protection expenses

If you follow these requirements, you may be eligible to get your loan forgiven completely (effectively turning it into a tax-free grant).

What Exactly Are "Payroll Costs"?

The PPP program's payroll expenses include:

•    Salary, commissions, gratuities, bonuses, and hazard pay (each employee's yearly maximum is $100,000).

•    Payments required to provide group health care benefits, including insurance premiums; employee benefits, including costs for vacation,               parental, family, medical, or dismissal. Payments needed for the provision of group medical coverage, along with insurance payments, as well as the amount of any pension benefits.

•    Compensation is subject to state and municipal taxes.

•    Wages, commissions, income, or net profits from self-employment, capped at $100,000 annually for each employee for a single proprietor or independent contractor.

The majority of the payroll expenditures are covered. The following circumstances, however, are not covered:

•    Expenses incurred by independent contractors

•    Owners of S corps and C corps who aren't on payroll (shareholders dividends aren't considered payroll

The Wage Ceiling of $100,000

Individuals earning more than $100,000 have their payroll expenditures restricted, as previously stated.

You can only claim $100,000 if you or any of your workers earned more than $100,000 in 2019 or 2020. (and nothing above it). For the PPP, if an employee earns $120,000, you would deduct $20,000 from their pay.

The average monthly payroll would be $8,333.33 ($100,000 divided by 12). If net profit were over $100,000 in 2019 or 2020 as a single proprietor or independent contractor without payroll. This would likewise be restricted at $100,000. Your average monthly payroll would be $8,333.33 if you split this by 12.

How Much PPP Financing Am I Eligible For?

Your monthly average payroll expense in 2019, 2020, or the one-year period before the application is the maximum amount you can obtain from your SBA-approved lender. Multiply by 2.5 to get a total of $2 million.

Businesses in the food and lodging industry are eligible for 3.5 times their typical payroll expenses, up to $2 million in total.

Will compute the monthly average payroll cost differently if you are a seasonal company. Between February 15, 2019, and February 15, 2020, you can utilize any 12 weeks.

What is the procedure for applying for a PPP loan?

The SBA does not make the loan; instead, it “backs” the loan that the lender makes. To locate a qualified SBA 7(a) lender, use the SBA's Lender Match service.

You'll be required to verify the following as part of your application:

•    The financing is required to sustain your continued activities due to the current economic uncertainties.

•    Will utilize the money to keep employees, pay their salaries, and make mortgages, rent, and utility bills.

•    You have already used up the cash from your first draw PPP loan if you apply for a second draw PPP loan.

You'll Require Financial Documents

To substantiate your payroll expenditures, you'll need to produce bookkeeping documents.

It might involve the following:

•    Records kept by the payroll processor.

•    Payroll tax returns

•    2019 or 2020 payroll tax forms (Forms 941, 940, and W-3)

•    Records from Form 1099-MISC

•    For a sole proprietorship, use Schedule C

If you have workers (and you pay yourself through payroll), obtaining a payroll report from your payroll provider is the simplest method to receive the financial information you'll need.

If you're self-employed and don't yet have a full Schedule C to file, you'll most likely need to acquire retroactive bookkeeping to figure out your net profit.

Besides bookkeeping, correctly displaying your net income, which would be the number on which your PPP loan amount is based, would be pretty challenging. Bookkeeping pro services can perform your bookkeeping for you if you don't have a dependable bookkeeping solution.

If you own many businesses, Entrepreneurs who run many companies, according to reports, their firms' funds aren't segregated, they have a hard time receiving relief financing.

How To Apply For Forgiveness Of PPP Loans

Can forgive all costs connected to the following in the 24 weeks after your loan signing date:

•    Salary, wage, vacation, parental, family, medical, sick leave, health benefits, bonuses, and hazard pay includes in the payroll. Individual remuneration is restricted to a maximum of $100,000 per year.

•    Mortgage interest is deductible if the loan was before February 15, 2020.

•    Rent as long as was signed the lease agreement was signed before February 15, 2020.

•    Utilities as long as the service started before February 15, 2020

•    Expenditures for operations such as software, cloud computing, and human resources

•    Property damage expenses any expenditures incurred in 2020 due to public disturbances not covered by insurance.

•    Supplier costs any buy order or goods order placed before receiving a PPP loan necessary for operations.

•    Worker safety expenditures any personal protective equipment or property upgrades necessary to be COVID compliant beginning March 1,         2020

To substantiate your spending over the loan time, you'll need to keep detailed records and maintain precise bookkeeping.

To be eligible for total debt forgiveness, you must have spent 60% of the loan on wages. Bookkeeping pro services can help you keep track of your spending so you can get the most out of your forgiveness.

When your covered time ends, you will appeal to your lender for forgiveness. Typically, this is accomplished over the internet. To discover whether one is available, go to your lender's website. After receiving your application, your lender has 60 days to make a decision.

Requirements For PPP Forgiveness

The Paycheck Protection Program aims to safeguard paychecks well. You must commit to keeping the average monthly number of full-time equivalent employees the same as or higher than the average monthly number of full-time employees.

There will be a reduction in the amount that can be forgiven…

•    will proportionately reduce any reduction in the number of staff retained

•    If any employee's pay is cut by more than 25%.

You will not be punished for having a drop in employee numbers if you rehire workers who previously laid off at the start of the period or restore any pay or compensation reductions made at the beginning of the period.

The deadline to repay loans acquired in 2020 was December 31, 2020. The deadline for loans received in 2021 is the conclusion of the covered period.

A New Exception For Rehiring Workers Has Been Enacted

Employees who have been laid off or placed on furlough may not want to get hired. If an employee declines your re-employment offer, you may be able to remove them from the forgiveness calculation.

To be eligible for this exemption, you must meet the following criteria:

•    You must have made a good faith written offer to rehire.

•    It would help if you offered them a rehire at the same base pay and hours as before they laid off.

•    You'll need proof of the worker's refusal of the offer.

It's worth noting that workers who turn down re-employment offers may lose their jobless benefits.

How will the cancellation of my PPP loans affect my taxes?

The new statute clarifies the impact of a PPP loan on tax reporting. The amount of a forgiven PPP loan is not considered taxable income. Furthermore, any costs paid for with a PPP loan remain tax-deductible.

A PPP loan has no bearing on your tax filing.

Paycheck Protection FAQs

Is it possible to apply for the PPP with more than one lender?

Yes! It's not a bad idea to apply to a few different lenders. Your firm will obtain an SBA approval number from whoever processes your application first (if you qualify for the loan). This number is referred to as a PLP. The SBA will only issue one PLP for each Tax ID, so there's no way you'll obtain a duplicate.

Lenders advise firms to submit applications to numerous lenders to maximize their chances of being approved on time. So far, neither the Treasury nor the SBA has published any guidelines indicating that you may only apply via one lender at a time.

If you are granted a PPP loan, your claim with some other lenders will ultimately be denied. Therefore it's better to retract your applications with the other creditors until you've been authorized for a PPP loan.

What is the difference between a PPP and an SBA catastrophe loan?

The SBA also offers an Economic Injury Disaster Loan (EIDL), which is sometimes referred to as simply an SBA disaster loan. It is a different but related effort. The following is how they differ:

•    There is no requirement for personal or commercial collateral. For loan amounts more than $25,000, the SBA disaster loan may demand collateral.

•    It's OK if you have other sources of credit. To qualify for an SBA catastrophe loan, you must typically have no other sources of financing.

•    The money is for a more limited range of uses (details below). An SBA catastrophe loan can cover most operational costs.

•    If you follow the conditions of your loan, you may be able to have it forgiven. Must pay the SBA catastrophe loan back.

What are the similarities and differences between the PPP and the SBA catastrophe loan?

•    You must certify (in good faith) that the loan is required for your firm due to the current economic uncertainties.

•    It is entirely free to apply.

•    Before you start repaying, you have a long deferral period (6-12 months, depending on your lender).

•    There is no penalty for paying in advance.

Is it possible to apply for both a PPP and an SBA catastrophe loan?

Yes, you certainly can. However, you can't use an SBA catastrophe loan for the same thing you may with the Paycheck Protection Program.

My staff has decreased. Is this going to have an impact on my PPP application?

It will have an impact on your PPP forgiveness application if you do not intend to rehire them or restore their salary for their regular working hours.

You must show that you have maintained your employees' salaries and wages and that their pay hasn't fallen below 25% of the specified monthly average for your forgiveness application.

I'm the only prop on the set. If I utilize owner draws, how do I display my salary?

If you're an alone proprietor, your average monthly payroll expenditure is calculated using your self-employment earnings. Is the net profit reported on a given day?

Because that is the amount on which you pay taxes, it is considered your wage. Therefore, you can calculate your monthly average payroll expenditures by dividing the year's net profit by 12.

Individuals earning more than $100,000 have their payroll expenditures capped, so if your net profit is more than $100,000, use $100,000 as your total income and $8,333.33 as your monthly average.