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Congress created the PPP as part of the $2 trillion CARES Act, authorizing the Treasury to use the SBA’s 7(a) small business – small, as defined by Small Business Administration – lending program to fund loans – up to $10 million per-borrower to spend on payroll, including benefits, rent, utilities, lease payments, and mortgage interest.
About $125 billion in funds are still available under the SBA’s PPP forgivable loan program which now expires on August 8th. You must apply as soon as possible through an approved SBA lender to get the application approved before the deadline.
Given the amount of funding still available, some restrictions have been recently eased to enable access to the money. Changes include, but are not limited to:
With the passage of the Paycheck Protection Flexibility Act of 2020 on June 5th (House Bill 7010: https://www.congress.gov/bill/116th-congress/house-bill/7010/text), it is now much easier for small business and other PPP borrowers to qualify for full loan forgiveness by extending the period for spending the loan funds to 24 weeks from 8 weeks for the "covered period."
Recent changes also include a reduction of the proportion of loan proceeds that must be spent on payroll costs from 75% to 60% (according to SBA PPP interim rules: https://www.sba.gov/sites/default/files/2020-06/PPP-IFR-Revisions-to-First-Interim-Final-Rule.pdf) and the establishment of safe harbor rules for businesses that have not been able to return to their level of business activity prior to the COVID-19 pandemic. Additionally, for any PPP loans made after June 5th, any leftover PPP loans owned by business owners are paid back at 1% per annum over a five year period, as opposed to the previous limit of two years.
If you believe you’re a candidate for the PPP forgivable loan, you must apply before the deadline on June 30th, 2020. For loan forgiveness, the loan proceeds must be spent on payroll costs, which includes benefits, and on specified non-payroll costs, defined as rent, utilities, lease payments and mortgage interest.
Keep these in mind when applying:
You must apply through an approved SBA lender, which includes both large and smaller community banking institutions. Many of the smaller community banks are still accepting applications and have been turning around the applications quickly.
The PPP loan amount is 2.5 times your average monthly payroll costs. The monthly average is computed by taking the sum of your 2019 total payroll, and employer paid health insurance and retirement contributions, and dividing it by 12. Alternatively, you can use a trailing 12-month period for the computation. The maximum loan amount is $10 million (SBA requirements and loan calculator: https://www.sba.gov/sites/default/files/2020-06/How-to-Calculate-Loan-Amounts-508_0.pdf)
For the PPP loan amount for the self-employed, sole proprietor, or independent contractor, their "Owner Compensation" is simply taking line 31 of their Schedule C filed with their 2019 tax returns, and divide by 12 for the monthly average before multiplying it by 2.5.
Payroll compensation is capped at $100,000 on an annualized basis for each employee. The same $100,000 cap applies for Owner Compensation.
The PPP loan application (SBA Form 2483) is not difficult to complete, and your local banker or lending institution is ready to assist.
The lending institution will require documentation to support the requested loan amount, such as payroll tax filings, invoices and cancelled checks. For the self-employed, sole proprietor or independent contractor all that is needed is their Schedule C filed with their 2019 tax returns.
The SBA released on June 17th a revised PPP loan forgiveness application and interim final rules. There is now both a Revised PPP Loan Forgiveness Application (SBA Form 3508) and an "EZ" version (SBA 3508EZ: https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Form-EZ-Instructions.pdf). This streamlined application should take less than 20 minutes to complete, if you meet one of the three requirements (the EZ application is primarily for the self-employed with no employees).
The new interim final rules established the 24-week maximum loan forgiveness at $46,154 ($100,000 for 24 weeks) per employee and for the Owner Compensation at $20,833 ($100,000 for 2.5 months). Since the PPP loan amount, for small businesses with employees, was based on 2-1/2 months of payroll costs, with 24 weeks or nearly six months, it should be much easier to achieve the full forgiveness amount of the PPP loan.
Documentation must be provided to the lending institution to support the amounts paid with the loan proceeds to be forgiven, such as quarterly payroll tax filings, invoices, remittance advice, and cancelled checks. For the self-employed, sole proprietors, or independent contractors, the required documentation is simply their Schedule C filed with their 2019 tax returns.
For additional information and resources for the SBA PPP loan program, please go to SBA.gov for the PPP loan application, PPP loan forgiveness application, instructions, and FAQs.
Accounting firms, CPAs, your tax advisor or financial advisor are other readily available resources to assist in navigating through the PPP loan process. Don’t miss out on a lot of forgivable loan money to continue to compensate your workforce.
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Disclaimer: The preceding is intended for educational purposes only.
Author, John Chiang, is a CPA with over 40 years of financial consulting experience. He formerly served as the Chief Financial Officer of Asian Health Services, a community health center based in Oakland, CA. Chiang also served as mayor of the city of Piedmont, CA from 2012 to 2014.The information and materials herein are provided for general information purposes only and are not intended to constitute legal or other advice or opinions on any specific matters and are not intended to replace the advice of a qualified attorney, plan provider or other professional advisor. This information has been taken from sources believed to be reliable, but there is no guarantee as to its accuracy. This communication does not constitute a legal opinion and should not be relied upon for any purpose other than its intended educational purpose.