Learn how to calculate gross income for your PPP loan with this straightforward guide. We’ll break down what gross income means, how it applies to PPP loans, and the steps to calculate it accurately. Perfect for small businesses and new employers, this guide simplifies the process so you can focus on securing the funds you need.
REMOTE PEOPLE NOTE
The Paycheck Protection Program ended in 2021, so you won’t be able to get a loan for your business via this route. However, if you received a first-draw or second-draw PPP loan, you could potentially get your loan forgiven.
Read on if you want to learn how gross income was calculated for the PPP. Whether you have already received a PPP loan and are pursuing PPP loan forgiveness, or you simply want to boost your financial literacy, you need to understand the financial concept. By the end, you’ll have some concrete information you can use indefinitely in the future.
The Paycheck Protection Program (PPP): An Overview and Updates
The Paycheck Protection Program (PPP) was a groundbreaking initiative put in place to help non-profits and small businesses survive the worst of the COVID-19 pandemic. The program was worth $953 billion, and businesses could pursue up to two loans based on eligibility. Here’s a table with some fast facts on the PPP:
| PPP Aspect | Details |
|---|---|
| Launch Date | April 3rd, 2020 |
| Administrator | Small Business Administration (SBA) |
| Purpose | Lend monetary relief to nonprofits, small businesses, and self-employed workers due to COVID-19. |
| Eligibility | Small businesses, sole proprietors, independent contractors, and some nonprofit organizations. |
| Loan Amounts | Up to 2.5x average monthly payroll costs (3.5x for certain industries in the second draw). |
| Forgiveness Criteria | At least 60% of the loan must be used for payroll expenses; the rest for eligible expenses. |
| Loan Term | 2 or 5 years, depending on the loan issuance date. |
| Interest Rate | 1% |
| Number of Approved Loans | 11.5 million |
| Program End Date | May 31, 2021 |
How PPP Loan Gross Income Was Calculated: A Step-by-Step Example
You know the basics of the PPP program; now let’s look into gross income and how to calculate it. In a nutshell, gross income is the entire amount your business makes from products and services before expenses and tax obligations. You can find it on your income statement.
Your gross income is calculated by subtracting the cost of goods sold from the total revenue your business makes. See the equation below:
Gross Income = Total Revenue – Cost of Goods Sold
To calculate your gross income, you need two variables – the Cost of Goods Sold (COGS) and the Total Revenue. You’ll learn how to find each of them below:
Cost of Goods Sold
COGS is any cost involved in producing your business’s products or services. For a local bakery, COGS would include the ingredients for the baked goods, shipping costs, storage costs, overhead costs like rent and utilities, and more.
Here’s the equation for COGS:
COGS = Starting Inventory + Purchases − Ending Inventory
Consider a situation where, at the beginning of the month, a bakery has $5,000 worth of inventory (flour, sugar, eggs, etc.). Throughout the month, the business makes $8,000 in purchases. And by month’s end, there’s $3,000 left in inventory.
Here are the values pertinent to the COGS equation:
- Starting Inventory: $5,000
- Purchases: $8,000
- Ending Inventory: $3,000
After plugging in these values and working through the equation, the bakery’s COGS is $10,000:
COGS = $5,000 + $8,000 – $3,000
COGS = $13,000 – $3,000
COGS = $10,000
Total Revenue
As for your total revenue, you’ll multiply the number of units your business sold in a given period by the price per unit. So, if you sold 5000 pastries for $5 each, the revenue would be $25,000.
Calculate Gross Income
Plug those values into the gross income equation to get the gross income. According to the figures in our hypothetical bakery scenario, the final equation would look like this:
Gross income = Total Revenue – COGS
Gross Income = $25,000 – $10,000
Gross Income = $15,000
Where to Find Your Gross Income
We mentioned that you can find your gross income on your income statement. It should be prominently labeled. If you are having trouble finding it on the statement, pull out your tax return. On your Schedule C, line 7, you’ll see your gross income.
Applying PPP Gross Income Calculations Today Post-PPP
Although the PPP was over as of 2021, calculating your gross income can still be useful to your business. You can use it for tax preparation, loan applications, and business planning. Here’s a little bit about each of these scenarios:
- Tax prep – Knowing your gross income is integral to calculating the amount of income that is subject to taxes. And it’s pertinent for both business and individual taxes.
When you have a good handle on calculating gross income, you can increase reporting accuracy and avoid potentially costly penalties down the line. - Loan applications – Whenever lenders are assessing your eligibility for loans, they need to know your gross income amount. It helps them calculate your debt-to-income ratio, an indicator of your level of risk.
Accurately reporting this information will be helpful to you in your pursuit of loan-based funding. - Business planning – To plan for your business’s future, you’ll need to know your gross income. It comes in handy when you’re formulating budgets, scoping out cost-saving opportunities, and boosting team productivity.
Tips for Keeping Accurate Financial Records
The above calculations were highly simplified – things can very quickly become convoluted if you don’t keep accurate financial records. Keep the below tips in mind in that regard:
1. Keep your receipts and invoices organized
Anything related to sales or purchases. Hauling around receipts can quickly become cumbersome, and it can be difficult to keep track of everything. In cases like these, consider using apps and tools designed to scan and store your documents for later.
2. Stay on top of inventory tracking.
Every month, take stock of your inventory to ensure you can accurately calculate your COGS. If it’s in the budget, consider apps that help you manage inventory. They reduce errors from human intervention and can save you a ton of time.
3. Use accounting software.
Without software like QuickBooks and Xero, getting your financial records in good shape and maintaining them can be a near-impossible task, especially as your business grows. We urge you not to shy away from tools like these – they are easy to use and can be extremely time-saving, given that they help you offload repetitive tasks.
4. Working with a finance professional.
Whenever you come across a complex or uncommon problem, you may need to work with a finance professional to keep your financial records together and accurate. You may also need professional assistance with loan applications and taxes.
5. Keeping your personal and business finances separated.
Doing so helps to prevent confusion and discrepancies around tax time.
Outsourcing Your Financial Business Functions
When you’re just starting out, you may be totally against outsourcing your financial business functions to someone else, preferring instead to keep this function in-house. But there are some overt signs indicating that you could use some help on this front. They include:
- You’re having trouble meeting deadlines related to payroll, payroll taxes, and more. In the worst situations, you might end up spending substantially more time on financial matters than spearheading efforts to grow your business.
- Errors have become commonplace. Yes, as humans, we make mistakes. But your financials need to be clean, or else it could cause substantial stress within your company. And that doesn’t even consider the legal repercussions and fees you could find yourself dealing with.
- Your financial needs aren’t straightforward. If you feel like your finances are nonstandard, you may need help from a professional with advanced knowledge.
- You don’t know much about finance. Someone who doesn’t have a solid finance knowledge base should not be handling finances. Handing your finances over to someone who has in-depth expertise means your business will be in much more capable hands.
- Your business is growing. As your business grows, your financials can become volatile, labor-intensive, and frankly confusing. Plus, chances are you’ll want to capitalize on your growth opportunities. Pouring your time and effort into financials won’t help you grow like strategic planning and execution will.
If any of the above issues apply to you, consider outsourcing your finance management to a capable professional or agency.
So, there you have it – everything you need to know about gross income for a PPP loan. We hope you found all the information you were looking for, and we wish you the best as you dive deeper into your business’s finances outside of PPP gross income.
Author: Susan Snipes
Susan is an experienced, certified HR and compliance professional who provides HR and compliance strategies to companies with global and US-based teams.
