As the economic impacts of COVID-19 continue to spread, small businesses are struggling.
A silver lining is that there are a number of economic relief options available, one of which is the Paycheck Protection Program, or PPP.
The PPP is a loan that can be forgiven if it’s used for expenses like paying yourself, rent, mortgage interest, and utilities.
The money first comes to you as a loan, but it’s eligible for forgiveness, meaning you don’t have to pay it back.
The clients I’ve been helping with this forgivable loan share some things in common:
-They want a loan that can be forgiven
-They work from home or maybe rent a coworking space.
-They pay themselves, even if it’s randomly or not a formal payroll.
-They’re either a solopreneur, have a team of all independent contractors, or maybe have a few W2 employees.
-Current economic uncertainty is affecting their business in some way. If you’ve lost clients, customers, or revenue, this could be a good fit for you.
These aren’t the only types of people or businesses that can apply for this forgivable loan, but just some examples of the types of people I’ve been helping apply.
So how much can you get?
You can apply for 2.5 times your “average monthly payroll”.
What can you use the loan for?
The loan can be used for payroll, rent, mortgage interest, and utilities.
What does forgiveness mean?
It means that as long as you meet the requirements for forgiveness, you will not have to pay that loan back. Essentially it turns into a grant.
How do you qualify for it to be forgiven?
At least 75% of the money must go towards 8 weeks of payroll.
You can use 25% of the money for rent, mortgage interest, and utilities.
If you work at home and don’t have any other qualifying expenses like rent, mortgage interest, and utilities, you would use 100% of the loan to cover payroll.
Since 8 weeks of payroll is the amount that is eligible to be forgiven, that’s 2 times your “average monthly payroll.” In this case, apply for your average monthly payroll times 2 to get 8 weeks, not the maximum amount which is 2.5 times the average monthly payroll.
Unless you need the money and would otherwise be funding things on a credit card. Any unforgiven amounts turn into a loan that has a 1% interest rate, 2 year repayment period, and you don’t owe any payments until 6 months after the date the loan begins.
If you laid off any employees, you would need to rehire them back and maintain your full-time employee headcount. Their salary can also not decrease by more than 25%.
Do you need a formal payroll set up?
How do you calculate your “average monthly payroll?”
If you’re an S-Corp and have a formal payroll set up, you will use that amount. Profit above and beyond your salary, or money taken as an owner’s draw does not count.
The loan will not cover payments to independent contractors.
If you don’t have a formal payroll setup, you calculate your “average monthly payroll” by taking your net earnings from self-employment and dividing by 12.
Your net earnings from self-employment are your revenue – expenses. It can be found on your Schedule C tax return and is the “net profit” number on your Profit and Loss statement.
What do you have to do to get the loan forgiven?
You submit a request to your bank along with documentation that you used the money expenses that qualify for forgiveness – payroll, rent, mortgage interest, utilities.
This may be payroll documentation, bank statements, verification of rent or utility payments. The bank will make a decision on forgiveness within 60 days.
You must use the loan for the forgivable expenses within 8 weeks of the date that you receive the money.
As of the writing of this post, we’re still in the process of applying, waiting for approval, and maybe some people have received some funds. People haven’t started to go through the forgiveness process yet, so there are still uncertainties about the specifics of exactly what this will look like in practice, but the above guidance tells us that we’ll need to use the money within 8 weeks and provide documentation that it was used for payroll, rent, mortgage expenses, or utilities.
What documents will you need to show your payroll?
Depending on where you bank, there may be different requirements, but here are some examples…
2019 IRS Quarterly 940, 941, or 944 payroll tax reports
Third-Party Payroll Processing Summary Documents
Company-Prepared Payroll Summary Documents
2019 Company-Prepared Financial Statements aka Profit & Loss Statement
2019 Business Tax Return
2019 Personal Tax Return (if the business files as a sole proprietorship, single entity LLC)
2019 IRS Schedule C
Some banks may just need to see one document. Others may request a few.
How do you apply?
Through your bank where you hold your business account.
What if your bank isn’t accepting new applications?
This may be tricky, since many banks aren’t accepting new customers. I’ve heard that smaller local banks and credit unions are accepting new customers, so that’s your best bet.
If you apply, will you get the money?
I can’t say. The program is first come, first served. There’s been $305 billion allocated for this program. According to this article on entrepreneur.com the American Bankers Association reported on April 12th that $205 billion has been claimed and $145 billion is still available. There is talk in Washington about adding funding to the program, but nothing formal has been approved.
Should you apply if the money is “drying up?”
That’s up to you, but I would. Applying isn’t going to hurt you, and there’s still money available with the chance of more money being allocated to the program.
This is a broad summary of some of the information about the program to keep it short, sweet, and not overwhelming. Although if it still feels overwhelming, that’s totally normal and okay too. I’ll share some links at the end of this post if you’d like to do more research.
If you want to save time doing research and ask some questions, email me: firstname.lastname@example.org
If you want 1:1 support to figure out what documents you need, how much to apply for, and someone to complete the application process with you, check out my PPP help service.
Some places to get more information: