Employ
Recruit
Summary: A beginner-friendly guide to the Paycheck Protection Program (PPP), covering its definition, eligibility requirements, and how PPP loan forgiveness works.
During the COVID-19 pandemic, countless small businesses were underwater financially; shutdowns reduced or cut off business, and sickness ravaged community after community. As a result, many businesses – especially smaller ones – were struggling to make ends meet.
Expanding your business in the thick of the pandemic in 2020 and 2021 would have been a longshot; very few businesses were doing well at the time. So, the government stepped in to provide a lifeline to keep millions of businesses from shutting down, laying off employees, or taking other actions to stay afloat in those turbulent times. That help came in the form of the Paycheck Protection Program (PPP) loan.
If you want to learn more about PPP loans, whether you can get one now, and more, this guide on the Paycheck Protection Program will come in handy. We’ll cover absolutely everything you need to know about this small business lifeline. By the end, you’ll know the best next step to take.
REMOTE PEOPLE NOTE
The PPP became active in April 2020 and ended about a year later in May 2021. As of the time of this writing, businesses cannot apply for a PPP loan.
However, those who have gotten PPP loans in the past may be able to get their loan forgiven (we’ll address this later on in the article).
What is the Paycheck Protection Program?
In the simplest terms, the Paycheck Protection Program (PPP) loan was a Congress-approved COVID relief program administered by the Department of Treasury and implemented by the Small Business Administration. This was a behemoth of a program worth hundreds of millions of dollars.
The overarching goal of the PPP loans was to provide the cash small businesses needed to keep from closing down and laying off employees. It was also intended to enable businesses to bring back employees they were essentially forced to lay off. The loans were federally guaranteed.
The PPP was rolled out in two phases – the first draw and the second draw. If a company needed to spend all of the money from the first draw and was eligible for additional assistance, they could apply for the second draw and receive additional funds.
According to the US Department of the Treasury, not all businesses were eligible for the program – only small businesses and certain VA organizations, nonprofit companies, and tribal businesses.
Fast Facts on Paycheck Protection Program (PPP) Loan
In a nutshell, here’s information that everyone should know about the Paycheck Protection Program (PPP) loan:
| PPP Loan Feature | Details |
|---|---|
| Fees | None |
| Interest rate | 1% |
| Loan Maturity | 2 years – loans made before June 5, 2020 5 years – loans made after June 5, 2020 |
| Loan Forgiveness | An option that may be available based on eligibility |
| Coverage Period | 24 weeks of coverage starting from the initial loan disbursement |
| Payment Deferral | No loan payments required until the forgiveness application is processed OR 10 months post coverage period. |
| Collateral & Guarantees | None |
We’ll touch on these topics and more as we move through this guide.
What Can PPP Loans Be Used For?
Businesses that were approved for the PPP loan may have mistakenly thought they could use the money on whatever they wanted. That just wasn’t the case. Per the US Department of the Treasury, PPP loans could be used only for specific expenses.
The majority (60%) of the loan funds had to be applied to payroll expenses and any contracted benefits owed to employees. After all, payroll support was the main purpose of the program in the first place.
The other 40% could be spent on a number of these expenses, including but not limited to the following:
- Cost of goods sold.
- Lease and rental payments
- Utilities
- Non-covered property damage
- COVID-related worker protections
Business owners and operators were encouraged to do the right thing with the money because of the prospect of getting the loan forgiven at a later date (more on that later in this article). You could only get your full loan forgiven if you were eligible and didn’t use the money in ways that weren’t permitted by the law.
What Constitutes Payroll Costs?
Above, we mentioned that the majority portion of PPP loans could only be used for payroll expenses. In order to ensure that loan applicants and users were able to abide by that rule, the PPP defined “payroll costs” as:
- Wages, salary, tips, or commissions (there was a cap of $100,000 on each employee per year).
- Costs associated with parental, vacation, family, sick, and medical leave.
- Separation and dismissal allowance.
- Group health care benefit costs and insurance premiums.
- Payroll taxes (both state and local).
For an independent contractor or sole proprietor, things were a little different. Payroll costs for these individuals encompassed only earnings from self-employment (commissions, wages, income, etc.). And there was also a cap of $100,000 for each employee per year.
PPP Loan Eligibility: Who is Eligible for a PPP Loan?
As you may have expected, not everyone will be eligible for a PPP loan – there are very specific requirements as to who could receive either of the loans ( first draw or second draw). Businesses had to be affected by COVID-19 and fall into one of the below business categories:
- Independent contractors, sole proprietors, or those who are self-employed.
- They met the size standards set by the small business administration (either industry size or alternative size).
- They were a 501(c)(3) nonprofit organization, tribal business, or 501(c)(19) veterans organization with less than 500 employees OR they met the SBA industry size standard if more than 500 employees.
- They had a NAICS code that starts with the number 72 (which stands for accommodations and Food Services), has multiple physical locations, and has less than 500 employees at each location.
REMOTE PEOPLE FURTHER READING
This information was pulled from the Small Business Administration government page.
Of course, eligibility could only be determined after an application was received and reviewed.
Who is Not Eligible for a PPP Loan?
Many businesses that thought they’d be eligible for a PPP loan were not. And it was for one or more of the following reasons:
- They or the owner of the business was bankrupt or in the middle of bankruptcy proceedings.
- The business was not in operation on or before February 15, 2020.
- The business’s only employees were nannies and housekeepers, which was not considered a true business.
- One or more of the owners of 20% or more of the business have been involved with criminal fraud in the past.
- The owner, or any business that they (or any of the other owners of the business) owned, has not paid a previous SBA loan or has defaulted on it. The same applies to other Federal Agency loans over the last 7 years.
- The lender through which you applied for the PPP loan is affiliated with you.
- Your business operates in an industry that is not eligible for SBA loans.
How Much Will Your PPP Loan Be?
One of the biggest questions people had regarding the PPP loans was how much they could expect if they were approved for assistance. At maximum, people were able to receive PPP loans of up to 2.5 times the average monthly payroll for the business. That was true for both the first draw and the second draw. There was a cap of $10,000,000 for the first draw and $2,000,000 for the second draw. Applicants were encouraged to apply for the maximum amount, given that there was no guarantee that additional relief would come.
How to Apply: The PPP Loan Application Process
The PPP loan application process was pretty straightforward, so long as applicants were diligent about reading the application form.
Step 1: Determine whether they were eligible.
Business owners were advised to determine whether they were eligible based on the information we mentioned earlier. If they weren’t eligible, they would find out later on, but it was best to do research beforehand. It would save ineligible businesses time.
Step 2: Choose a lender and go in person to one of their locations.
Those who were interested in applying for a PPP loan would apply in person at a Small Business Administration-approved bank, credit union, or other financial institution. Not all banks or financial institutions would be able to handle PPP loan applications.
Step 3: Fill out the application and include the necessary documentation.
They’d fill out the Paycheck Protection Program Borrower Application Form. On the form, they’d have to disclose substantial information about the company, including the business type, owners of 20% or more of the company, demographic information, a short questionnaire, and several disclosures. They’d then sign the form and submit it per the requirements.
You can find the application on the Small Business Administration website here.
Documentation for PPP Application
While filling out the application, businesses would be required to reference information from various types of documentation. Every business’s situation would be a little different, but here are the main documents they might need to bring to the PPP application appointment:
- Previous payroll tax filings
- Schedule C (for businesses that are sole proprietorships)
- Documents proving that the business was in operation on or prior to February 15, 2020
- Profit-and-loss statements
- Records from the payroll processor
If people weren’t able to obtain all of the required forms, they would have to use other means to calculate the totals necessary for the PPP application. But that wasn’t always an option. Some forms would need to be included with the application, and if they weren’t, that could result in the denial of the application.
Step 4: Wait for a response from the SBA.
Once the form and all of the accompanying documentation were sent off to the appropriate party, all applicants could do was wait. The timeframe for the response and determination from the SBA was very short – usually less than 24 hours.
Step 5: Wait for the loan to be funded.
As soon as the approval went through, the funding clock started ticking. Within 2 weeks, the funds were transmitted to the borrower.
What Were the Paycheck Protection Program Terms?
The Paycheck Protection Program terms were very cut and dry, modeled after other Section 7(a) loan options. The loan came with a guaranteed percentage of 100% and an interest rate of 1% (non-adjustable and non-compounding). If the loan was issued before June 5, 2020, it had a maturity of 2 years. And if it was issued after that date, the maturity was 5 years. Personal guarantees and collateral were not required. Also, the lenders were not allowed to charge any fee to small businesses – neither was the government.
The Rundown on PPP Loan Forgiveness
PPP loan recipients that followed the 60/40 rule (where 60% of the loan funds would go to payroll expenses) can attempt to get the loan forgiven by submitting an application. Over 10 million PPP loans were forgiven by the end of 2021. If you haven’t yet pursued PPP loan forgiveness, there’s still time to do so.
How to Apply for PPP Loan Forgiveness
The application process for PPP loan forgiveness is very clearly laid out on the Small Business Administration website. There are two routes one can use to pursue forgiveness, and it depends primarily on the amount of the PPP loan.
Loans Less Than $150,000
If the loan was $150,000 or less, the borrower would reference and use the SBA form 3508S loan forgiveness application. In this document, you’ll not only find a form to fill out but also instructions for proper use of the form. This is to ensure proper processing of your application.
The interesting thing about the loan forgiveness application is that it doesn’t require you to submit documentation along with the application, at least initially. However, if, during the loan review or audit process, the SBA needs additional information, you should be ready to provide it. So, it makes sense to keep any relevant payroll or PPP loan documents on hand.
This loan application is the most simplified of all of them, and because of that, it’s the most widely preferred.
Loans Over $150,000
If the loan was over $150,000, you have two potential forms to choose from to request loan forgiveness:
- SBA Form 3508 – This form is for all borrowers with loans over $150,000 who don’t qualify to use either 3508EZ or 3508S. This is by far the most complex of all of the loan forgiveness forms. If you qualify to use one of the other forms, you’ll have a much easier time applying for loan forgiveness.
- SBA Form 3508EZ – This form is for borrowers with loans exceeding $150,000 who meet one of the following criteria:
- Are self-employed and have no employees.
- Have employees but their wages were not cut by more than 25 percent, they didn’t downsize their workforce, and they didn’t cut any of their employee’s hours.
- Have employees but the wages were not cut by more than 25 percent, and they weren’t able to operate as they normally would because of COVID-19’s effects on activity, health guidance, and mandatory compliance.
REMOTE PEOPLE NOTE
As of March 13, 2024, those who want to apply for loan forgiveness can go to the SBA PPP Direct Forgiveness Portal. You’ll fill out the same information you would on a physical form but in a more user-friendly way online.
Tax Implications for PPP Loans and Loan Forgiveness
According to TaxAct, any loan money you received due to the PPP program is not considered taxable income, regardless of whether you are able to get the loan forgiven. It’s deductible. You can find evidence of this in the Consolidated Appropriations Act of 2021. Also, PPP loans that are forgiven are not considered cancellation of debt income, so there’s no need to report your loan proceeds to the IRS on your tax return.
As for partnerships and corporations, TaxAct recommends that you report your PPP loan on your balance sheet as a liability. Feel free to report it as a mortgage, note, or bond payable in one year or more, or a non-recourse loan. Also, for partnerships and corporations, whenever your PPP loan was forgiven, it may have been classified as book income.
To ensure that you recognize this income as non-taxable on your federal return, you need to recognize a book-tax difference on Schedule M-1 – Reconciliation of Income (Loss) per Books with Income (Loss) per Return.
Common Pitfalls of PPP Loan Forgiveness
As you pursue PPP loan forgiveness, you could experience several issues that could impede your ability to get your application approved. But you can increase your probability of a clean application and forgiveness process by keeping the following tips in mind during the application process:
A Mistake on the Application
A single mistake could cause your loan forgiveness application to be denied. So, do your due diligence to review the requirements included with the application and ensure that you have sufficient evidence to back up the information you’ve given. If you’re unsure about anything regarding the application, be sure to seek advice from a finance professional.
Not Following the 60/40 Spending Rule
Did you follow the PPP 60/40 spending rule, where 60% of PPP loan funds must be used for payroll expenses, and the other 40% must be used for rent, mortgage, utility payments, etc.? If you didn’t use your loan money in this manner, you will be denied forgiveness.
Not Correcting Issues from Your PPP Loan
Often, people find that they made a mistake on their PPP loan and ignore it, assuming that the SBA should have caught it. Or they may decide against acting because the organization hasn’t yet uncovered it. This method doesn’t work well. What can happen is that mistakes associated with a PPP application can be identified during the forgiveness process, leading to delays and other problems. The best route to take if you identify a problem with your PPP application is to talk to a legal professional.
So, there you have it – a rundown on the Paycheck Protection Program. Remember that if you already drew from the program’s funds, you could qualify for forgiveness. We hope that you found all the information you were looking for, and we wish you the best with your business now and in the future.
Frequently Asked Questions
Can you get in trouble after PPP loan forgiveness?
When you signed up for a PPP loan, you agreed under oath that the information on the application was true (among other things).
So, if someone purposely attempts to forgive their PPP loan fraudulently, they could end up on the receiving end of IRS penalties, which could hurt the business from a financial standpoint. In addition to that, civil and criminal prosecution could also come into play for the most serious offenses.
Just because a person hasn’t been notified by the IRS that they are under investigation for COVID-19-related fraud doesn’t mean they aren’t. The IRS’s Criminal Investigation (CI) division has made it a point to look into PPP loan fraud as of 2021.
What is the deadline to apply for PPP loan forgiveness?
There is a defined deadline to apply for PPP loan forgiveness – up to 5 years after receiving a loan number from the SBA. You can also apply after using up all of the loan proceeds you intend to get forgiven. It’s important to apply as soon as you deem it necessary (keeping the above information in mind) so that if you run into roadblocks, you won’t miss the forgiveness deadline.
What documentation is required for PPP loan forgiveness?
The documentation you have to include on your PPP loan forgiveness application will vary based on your PPP loan, business situation, and, consequently, the loan forgiveness application you choose. You’ll find the list of required documents on the form you need to fill out to apply.
For instance, if you’re filling out form 3508, look under the heading “Documents that Each Borrower Must Submit with its PPP Loan Forgiveness Application.” Bank account statements, third-party payroll service provider reports, tax forms, and payment receipts are just a few pieces of documentation to include.
Do I still qualify for forgiveness if I reduce employee wages or headcount?
The stipulations surrounding how your business has changed over time can be very confusing for businesses and individuals. You could still qualify for forgiveness if you reduce employee wages or headcount. But only if your wages weren’t reduced by over 25% or headcounts haven’t changed significantly. Remember that the only way to know for sure whether you’d be eligible for PPP loan forgiveness is to apply and see how the SBA responds.