Ppp First Draw Eligibility Criteria
If the following statements apply to your business, you are eligible to apply for your first PPP loan.
Your business was operational before February 15, 2020
Your business is still open and operational
You have no more than 500 employees
If your business has multiple locations, you have no more than 500 employees per location
How Ppp Loans Work
PPP loans are available to small businesses through May 31, 2021. However, there’s a finite amount of funding. If the money runs out before the deadline, business owners will be out of luck. PPP loans are given at an interest rate of 1 percent, with no required collateral and no other fees.
After the CARES Act passed in March 2020, some businesses received First Draw funds from the PPP. The December legislation that passed enabled businesses to apply for Second Draw funds or for First Draw funds if they werent able to receive funds earlier in 2020.
PPP loans are forgivable, which means that business owners aren’t obligated to pay them back as long as they follow specific guidelines. The terms of forgiveness dictate that the business uses the loan money to keep the business operational, and 60 percent of the funds must go to cover payroll expenses.
Key Factors Of Ppp First Round:
- Eligible businesses could avail themselves 2.5 times more of their average monthly payroll costs, up to $10 million.
- If the businesses use a minimum of 60% of their funds to operate payrolls, SBA may write off their debts.
- Another silver lining of this loan is that it does not demand collateral or a personal guarantee.
- 1% is the rate of interest.
On December 27, 2020, Congress passed a bill renewing funding under the CARES Act, adding up $284 billion for striving small businesses of the U.S.
There are few amendments made in the PPP loan processing and forgiveness. A hike in eligible PPP applicants increased forgivable expenses and streamlined the application process. One can look up accounting and bookkeeping services as an adequately maintained financial record of a business is a must.
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Pay Reduction Beyond The 75% Threshold
Letâs say you have three employees that each made $3,000 per month before COVID-19. Your PPP loan amount was $22,500 . You had to lay them off in February 2020 due to COVID-19. You hired back all three of your employees, but at a reduced salary of $2,000 a month.
Over the 24 weeks of the PPP coverage period, you spend $36,000 on your employees . You claim the full $22,500 of your PPP loan for forgiveness.
When it comes to calculating your forgivable amount, your lender looks at each employeeâs individual compensation. The 75% minimum salary is $2,250 . Youâre paying each person $250 less each month. The $250 difference is scaled up to the 24-week period totalling $1,500. After multiplying this by three employees, $4,500 would be deducted from the forgivable amount. This results in a total of $18,000 forgiven .
A conversation with a bookkeeper can help make sense of your specific situation. This is where Bench comes in. Learn more about who we are and how we can help beyond monthly bookkeeping.
Add Or Confirm Existing Business Information
Make sure everything in this section is fully filled in. Below are some sections to pay special attention to.
- Business address: Confirm that the address is accurate, including the 5-digit zip code .
- Business type: Verify youve selected the right business type. This affects the documents you may be required to provide.
- Business Tax ID: Enter or confirm that you have entered a valid 9-digit tax ID. Double-check for any typos and confirm that the ID number is 9 digits long.
- Loan amount requested: The requested amount should be 2.5 times your average monthly payroll costs. It should not be $0. It should not be hundreds of millions of dollars. For help, you can use our PPP loan calculator.
- Employee count: Verify employee count is between 1 and 500. Sole proprietors and 1099 workers should enter 1. 0 is not a valid entry.
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What Documentation Will Be Required To Demonstrate The 25% Revenue Reduction
Quarterly âgross receiptsâ for one calendar quarter in 2020 and the âgross receiptsâ for the corresponding calendar quarter in 2019. Per the U.S. Treasury borrower guidance for Second Draw loans, the following are the primary sets of documentation that can be provided to substantiate your certification of a 25 percent gross receipts reduction :
- Quarterly financial statements for the entity. If the financial statements are not audited, the Applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item that constitute gross receipts, the Applicant must annotate which line item constitute gross receipts.
- Quarterly or monthly bank statements for the entity showing deposits from the relevant quarters. The Applicant must annotate, if it is not clear, which deposits listed on the bank statement constitute gross receipts and which do not .
- Annual IRS income tax filings of the entity . If the entity has not yet filed a tax return for 2020, the Applicant must fill out the return forms, compute the relevant gross receipts value , and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entityâs tax return.
Ppp Loan Forgiveness For Sole Proprietors And The Self
When the coronavirus pandemic began, there sure was a lot that went wrong with the Small Business Administrationsâ Paycheck Protection Program a.k.a. the Cares Act passed by Congress, wasnât there?
- The first round of funding was snatched up so fast that many small businesses were left out in the cold.
- Not to be caught off-guard again, small businesses flooded the SBA site when funding again became available and the site crashed.
- Unbelievably, even though there are more than 10 million self-employed freelancers, sole proprietors, solopreneurs, and independent contractors in the U.S., they were not even eligible for the first round of PPP loans.
Maybe even more odd was the fact that some businesses/business people that applied for, and received, PPP funds clearly didnât fit the intent of the program:
The Los Angeles Lakers? Shake Shack? Kanye West? Yep.
How were these folks legitimate borrowers? How were they eligible to get PPP loan funds? Talk about rubbing salt into the wound.
And yet, despite all of that initial bad news, once the loan program gained some traction, the kinks were ironed out, changes were made and eligibility increased. For us, the best of these changes was that later rounds of PPP funding allowed the self-employed to get in on the assistance, even though many did not have actual âpayrollâ per se.
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How Can I Get My Ppp Loan Forgiven
Small business owners were eligible for two roundsor “draws”of PPP loans. If you received more than one draw, you must submit a separate application for each loan you received. You qualify for full loan forgiveness if, during the eight- to 24-week covered period following each loan disbursement, you:
- Maintained employee and compensation levels
- Spent your loan proceeds on payroll costs and other eligible expenses
- Used at least 60% of the proceeds to cover payroll costs
You must also spend all of your PPP money before you submit a request for forgiveness.
Business Taxes Are Not An Allowable Use Of Ppp Funds
The latest round of coronavirus relief also gives business owners more flexibility with how they spend PPP funds. Newly covered costs include protective equipment, property damage and business software.
Business taxes arent part of that expanded list. So if you use your PPP loan to pay your business taxes, that amount wont be forgiven.
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Are Amounts Attributable To The Business Operation Of A Tenant Or Sub
No. In an Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs originally posted on August 24, 2020, the SBA has stated that the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses. The IFR provides four examples:
Key Concepts For The Self
- Being an independent contractor means you are a small-business owner or sole proprietor.
- Receiving one or more 1099s constitutes being an independent contractor.
- As an independent contractor or sole proprietor, you would file a Schedule C with your 1040 tax return each year.
- Paying workers with a 1099 is NOT having employees. If you did have employees, you would issue W2s and pay employment taxes and Workers Compensation Insurance.
- You can have a Limited Liability Company and still be a sole proprietor or independent contractor.
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The Ppp Calculation For The Sole Proprietor
As stated above, this article applies to those of you filing a Schedule C as a sole proprietor/independent contractor, NOT if you are filing as an S-Corporation and taking a salary. I mention this again, because its important for sole proprietors to not get confused by some of the rules that apply to corporations and not to them. Please note the following:
- No calculation on the PPP application will involve payroll, because you dont have employees, and thus no payroll numbers for you or others will exist.
- Again, paying others with a 1099 is not considered payroll.
- Health-insurance premiums will not be considered in any part of the calculation.
- Contributions to retirement accounts, whether a SEP, Solo 401k or IRA, are irrelevant.
Next, in order for a sole proprietor to properly apply for the PPP loan, it is absolutely required that they have their 2019 1040 Personal Tax Return filed and the accompanying Schedule C.
Regrettably, in the early weeks of the stimulus plan, some banks anxious to help their customers would allow sole proprietors to apply with a simple 1099, a profit-and-loss statement or even a 2018 tax return. If any of these situations applied to you, and you ultimately received a PPP loan based on this information, its important you get professional advice immediately on how to move forward in the forgiveness stage and subsequent application.
2019 Schedule C Income
Total Divided by 12 and multiplied by 2.5
What Are Gross Receipts
SBA defines gross receipts as all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees or commissions, reduced by returns or allowances. Generally, receipts are considered âtotal incomeâ plus âcost of goods sold,â and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
Gross receipts do not include the following: taxes collected for and remitted to a taxing authority if included in gross or total income proceeds from transactions between a concern and its domestic or foreign affiliates and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.
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How To Report Ppp Loan On Tax Return
Filing small business taxes is pretty straightforward. The good news is that a forgiven PPP loan doesnât make the process any harder than it was in previous years. There are, however, a few things to keep in mind as you prepare to report and file tax returns:
- You canât use proceeds of a PPP loan to pay business taxes. They are specifically meant for non-tax expenses like payroll, utilities and interest.
- Youâre still allowed to claim employee retention tax credit provided your business meets the requirements. However, you cannot claim wages paid using a forgiven PPP loan. Your business is eligible for employee retention credit if i) it reported a 20% reduction in gross receipts compared to the previous year, and ii) you continued to pay employees despite having to temporarily shut down due to coronavirus restrictions. While these provisions became law on December 27, 2020, they are retroactive to March 12, 2020. You can use the credit for all wages paid until July 1, 2021.
- Taking out a PPP loan doesnât affect your family and sick leave tax credits as outlined by the Families First Coronavirus Response Act . However, youâre not permitted to pay for sick and family leave wages using the proceeds of your PPP loan.
- The CARES Act allows you to defer payroll taxes even if you got a forgiven PPP loan. However, 50% of accumulated taxes from 2020 must be paid by December 31, 2021 and the remaining 50% must be paid by December 31, 2022.
Ppp Loan Forgiveness For Self
One of the most appealing features of the PPP loan is the generous loan forgiveness. However, the updated rules for the self-employed may limit the amount forgiven. The reason for the limitation is that most independent contractors, self-employed individuals, and sole proprietors have far less overhead and could use all of the loan for compensation, causing an unintended windfall.
Congress determined that the maximum loan amount is based on 2.5 months of the borrowers payroll during the one-year period preceding the loan. Congress also determined that the maximum amount of loan forgiveness is based on the borrowers eligible paymentsi.e., the sum of payroll costs and certain overhead expenses over the eight-week period following the date of loan disbursement.
Essentially, you get 2.5 months of payroll and it can be forgiven if you use the funds appropriately and with careful documentation within the 8 weeks following disbursement. Divvys expense tracking and budgets are the smartest way to meticulously keep records of all expenditures of your business, especially when you need to justify the way you are using SBA funds.
Forgiveness is contingent upon proof of acceptable funds use, such as paid invoices, payroll processing records, bills, etc.
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What Is Square Capitals Relationship To Ppp
You may apply for PPP funding through Square Capital, but Square Capital, like all PPP lenders, plays no role in determining PPP requirements. All PPP requirements and guidelines are determined by the SBA. You are welcome to apply for PPP funds through Square Capital or any other approved PPP lender. Should you apply for and be approved for a PPP from Square Capital, Square Capital LLC will both issue and service your loan.
PPP funding through Square Capital has no relation to Square Capitals
Who Can Get A New Ppp Loan
First-time loans can go to a wider array of borrowers, provided they were in business on Feb. 15, 2020. Eligibility will now include news outlets with no more than 500 employees per location. In addition, 501 nonprofits and destination marketing organizations may be eligible if they meet limits on lobbying and size.
Sole proprietors, self-employed workers and independent contractors or side gig workers are also eligible.
Publicly traded companies are excluded from the latest PPP round.
Some funding is now set aside to help specific struggling groups:
Grants to live entertainment venues and organizations, museums and movies theaters that demonstrate a 25% reduction in revenues. Grant recipients cannot also get a PPP loan.
Loans made through community financial institutions and some small depository institutions.
Money for borrowers with 10 or fewer employees and to provide loans under $250,000 in low-income areas.
Changes announced on Feb. 22, 2021 remove additional restrictions, so business owners with delinquent federal student loans or non-fraud felony convictions are now eligible for PPP loans.
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Second Draw Ppp Loans
The stimulus legislation created second draw PPP loans for those who:
- Previously received a first draw PPP Loan and has or will use the full amount only for authorized uses by the date the second loan is disbursed
- Have no more than 300 employees and
- Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
More information about qualifying for a second draw PPP loan can be found here.
The calculation for second draw loans is similar to first draw loans with one exception: if your business has a NAICS code beginning in 72 you may qualify for a loan of 3.5 times average monthly payroll. Other businesses will qualify based on 2.5 times average monthly payroll as before.
The March 3, 2021 Interim Final Rule describes the following method for calculating the loan amount:
The maximum amount of a Second Draw PPP Loan to a borrower that has income from self-employment and files an IRS Form 1040, Schedule C, is calculated as follows, depending on whether the borrower has employees:
For a borrower that has income from self-employment and does not have any employees, the maximum loan amount is the lesser of:
the product obtained by multiplying: the net profit or gross income of the borrower in 2019 or 2020, as reported on IRS Form 1040, Schedule C, that is not more than $100,000, divided by 12 and 2.5 .
This amount cannot exceed $29,167 for NAICS code 72 borrowers and $20,833 for all other borrowers.