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Basics of PPP Loans for Small Business Owners

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COVID-related closures and restrictions have hit small businesses particularly hard. Many of them have closed permanently, while others are hanging on by their fingernails. Fortunately, help is available through the Paycheck Protection Program (PPP), which was first introduced in March 2020 under the CARES (Coronavirus Aid, Relief, and Economic Security) law. Under the P3, small businesses can get up to 24 weeks of financial assistance through federally guaranteed loans. Additionally, loans can be canceled as the proceeds are used for payroll and certain other expenses during the COVID-19 pandemic. Borrowers can apply for a PPP loan from any existing Small Business Administration 7 (a) lender or any eligible bank, credit union, non-bank lender, or farm credit system institution participating in the program.

However, PPP has a top-down history. For example, the initial PPP funding – around $ 349 billion – ran out just days after the program was launched. Some family businesses have also struggled to obtain loans. But Congress subsequently provided $ 310 billion in additional funding and made significant changes to the program, such as allowing more time to spend the loan proceeds and making it easier to cancel a loan entirely. However, new PPP loan applications were then halted on August 8, 2020 – until a second stimulus package was enacted in December 2020 that kick-started the program with additional funding of $ 285 billion. The law also opened a second PPP loan to companies that used up the entire proceeds of their first PPP loan. The relief bill enacted on March 11, 2021 injected an additional $ 7.25 billion into the program.

As it stands, the PPP will last until May 31, 2021 or until funds run out, whichever comes first. So there is still time to tap into this form of assistance. While uncertainty and confusion has surrounded the P3 since its inception, this should not prevent small business owners from participating in the program. Yes, there are a lot of rules and procedures that you have to follow. But getting to know the basics of PPP is a good place to start. This is what the following overview is designed to do.

Small businesses that did not receive a PPP loan in 2020 under the CARES Act can apply for a “first draw loan”. Existing PPP borrowers who have not received a loan forgiveness by December 27, 2020 can reapply for a first-draw PPP loan if they have already returned some or all of their loan funds. First-run PPP. A borrower who has received all of the benefits available from a first drawdown loan in 2020 under the CARES Act may only be eligible for a second drawdown PPP loan.

To be eligible for a first PPP loan draw, a borrower must have been in business on February 15, 2020 and either (1) have employees for whom they have paid salaries and social charges, (2) have paid independent contractors , or (3) operated as a self-employed person, independent contractor or sole proprietorship with no employees. The borrower must also be either:

  • Small business that, together with its affiliates (if applicable), has 500 or fewer employees;
  • Company with more than 500 employees meeting SBA size standards (either industry size standard or alternative size standard);
  • 501 (c) (3) or 501 (c) (19) organization with 500 or fewer employees per physical location;
  • 501 (c) (5), 501 (c) (7) or 501 (c) (8) organization with 300 or fewer employees per physical location that does not receive more than 15% of its revenue from lobbying activities;
  • Tribal enterprise;
  • Non-profit news organization;
  • Online news editor;
  • Housing cooperative with no more than 300 employees; Where
  • 501 (c) (6) or a destination marketing organization with 300 or fewer employees.

Borrowers can use PPP loans as a first resort for the following purposes:

  • Labor costs (wages; salaries; vacation, parental, family, medical or sick leave; and health benefits);
  • Mortgage interest;
  • To rent;
  • Public services (electricity, water, sewage, telephone, Internet, transport costs, etc.);
  • Operating expenses (for example, any software, cloud computing, or other human resource and accounting needs);
  • Costs of property damage (for example, damage due to public disturbances that occurred in 2020 and not covered by insurance);
  • Supplier costs (for example, any purchase order or order for goods placed before receiving an operations-critical PPP loan); and
  • Worker protection expenses (for example, any personal protective equipment or property improvements to stay in compliance with government requirements or guidelines set by the Department of Homeland Security, Centers for Disease Control and Prevention, Occupational Safety and Health Health Administration, or any state or local agency related to worker safety due to COVID-19).

From January 2021, certain eligible borrowers who have previously benefited from a PPP loan will be able to apply for a “second draw loan” with the same general loan conditions as the first draw PPP loan (see above).

There are, however, a few important differences. Each borrower must be an eligible first-draw PPP loan beneficiary and, with its subsidiaries, have no more than 300 employees. The borrower must also be able to demonstrate a reduction of at least 25% in gross revenue between comparable quarters in 2019 and 2020.

Borrowers seeking more than $ 150,000 should submit documents, such as annual tax forms or quarterly financial statements, at the time of their application to justify the 25% reduction in income from 2019. Borrowers who receive less of $ 150,000 must provide these documents when applying for loan forgiveness.

Up to 100% of the principal amount of a PPP loan and accrued interest can be waived. First and second draw PPP loans to eligible borrowers are eligible for full loan forgiveness if covered during the coverage period following loan disbursement:

  • Employee and compensation levels are maintained in the same manner as those required for the first PPP loan;
  • The loan proceeds are spent on staff costs and other eligible expenses; and
  • At least 60% of the revenue is used for salary costs.

A borrower can choose a covered period between 8 weeks and 24 weeks after receiving the PPP funds from the lender.

To get all or part of a PPP loan canceled, a borrower must complete and submit a loan cancellation request. Borrowers are also required to keep records and have accurate accounts to prove their spending during the loan period. When the covered period is over, borrowers should request a rebate through their lender. Use SBA Form 3508, Form 3508EZ, or Form 3508S (Forms 3508EZ and 3508S are shorter versions of the application for borrowers who meet specific requirements).

Some lenders may also have their own rebate forms. So, borrowers should check with their lender to determine which form is the right one for their loan. After a borrower requests a rebate, the lender must provide a response within 60 days.

For first-time borrowers, the maximum loan amount is 2.5 times their average monthly salary costs for 2019 or 2020, up to $ 10 million. First-time borrowers can use either calendar year 2019 or calendar year 2020 for the purpose of calculating their average salary costs.

The maximum loan amount for a second drawdown PPP loan is 2.5 times the borrower’s average monthly salary costs in 2019 or 2020 up to $ 2 million.

For borrowers in the accommodation and food services sector (NAICS code 72), the maximum loan amount for a second PPP loan drawdown is 3 ½ times the borrower’s average monthly salary costs in 2019 or 2020 up to $ 2 million.

Normally, canceled debt is generally considered taxable income. However, the CARES Act states that any canceled PPP loan amount will not be taxed.

The IRS initially ruled that borrowers could not claim a tax deduction for business expenses that result in the cancellation of a PPP loan. However, Congress overturned that decision in December. As a result, tax deductions are allowed for the payment of qualifying business expenses even if the payments would (or should result in) the cancellation of a PPP loan.

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