What is PPP and how does it work?
The Paycheck Protection Program (PPP) is a forgivable loan program Congress developed within the CARES Act of 2020. It’s one weapon in the federal government’s arsenal to combat the economic fallout from the COVID-19 pandemic. The program is administered and funded by the Small Business Administration (SBA) but you apply thru your bank (or other authorized lender). Small businesses with employees can use the PPP loan for payroll, rent, utilities and mortgage interest. If you’re self employed (independent contractors and sole proprietorships) with no employees can also apply for this (potentially) fully forgivable loan. You must spend the money within 8 weeks of receiving it and document your expenses. In this guide we will focus on how to successfully apply for and receive a fully forgivable PPP loan. This guide is broken down into three steps: application and receipt of funds, documentation and use of funds and requesting loan forgiveness (Yes, you have to request. It’s not automatic).
The PPP Application Process
Prerequisite Requirements
You were working as an independent contractor or sole proprietor as of February 15, 2020.
You were adversely impacted by the COVID-19 pandemic (you loss business/money).
You must provide documentation to verify your loan request.
Calculating the Loan
The PPP loan is 2.5 of your average monthly 1099-MISC income or net Schedule C self-employment income.
The max loan a self employed person can receive is $20,833
If you have multiple Schedule C businesses using the same social security number, you can combine the net income from all Schedule C forms and use that number to calculate your average monthly income.
If you have businesses with their own individual EIN/tax ID numbers, each business can apply separately.
Do not include any 1099-MISC income that is included in your Schedule C income
You do not have to take the full amount you’re eligible to receive. If you cannot spend it on allowable expenses, you’ll have to repay it. Choose your loan amount wisely.
EXAMPLE: You’re a freelance graphic designer and you report your income on Schedule C of your 1040 tax return. Your 2019 Schedule C shows net income in the amount of $57,400.
$57,500 (2019 net Schedule C income) / 12 months in a year = $4,791.67 (average monthly income)
$4,791.67 (average monthly income) x 2.5% = 11,979.18 (Your max PPP loan)
Loan Documentation
Loan application (digital application provided by the bank or loaner)
Proof of income (2019 Schedule C or 1099-MISC)
Proof of 2020 business activity (business invoice, bank account statement or financial statements between Jan-Feb 15 2020)
Government issued ID (this requirement varies by lender)
Some lenders may require you to have an account with them (even though this is not required by the SBA)
Loan Process
Do your research on the various COVID-19 related relief options available to you. Once you decide you want to apply for PPP, continue to step 2.
Gather your documents and calculate your potential PPP loan.
Select a lender (usually your bank but can be any PPP lender). NOTE: Regardless of where you apply or how many times you apply, you can only get ONE (1) PPP loan.
Complete the application and provide your Loan Documentation. Within the application you’ll provide the bank account information for where you want the funds deposited. Note: It is helpful to open a new account for your PPP funds to keep the money separate for reporting purposes. This is not a requirement.
Sign the application electronically. Save a copy for your records.
Once you’re approved, sign the SBA Loan Note. Save a copy for your records.
Funds are deposited in your account. You have 8 weeks to spend them.
Using PPP Funds
If a small business spends their PPP funds on certain forgivable expenses, the entire loan will be fully forgiven. Loan forgiveness will apply to funds spent on the following BUSINESS expenses: payroll, rent, utilities and mortgage interest. At least 75% of the loan must be spent on payroll. As a self employed person, 8 weeks of your net self employment income is considered payroll or “Owner Compensation Replacement.” You can use this money on anything or save it. The remaining balance of your loan must be used on the following BUSINESS expenses: rent, utilities and mortgage interest (yes, the cost to maintain a home office or studio is included in these expenses).
Calculating Owner Compensation Replacement
Multiple your 2019 Schedule C Net Income (Line 31 of the Schedule C) by 8/52 or 0.154
Example: $43,200 is the net income reported on your 2019 Schedule C
$43,200 * 0.154 = $6,652.80 (fully forgivable and can be spent on anything)
In this scenario $9,000 is the max PPP loan you can request. As we know from above, $6,652.80 is considered payroll (your salary) leaving a balance of $2,347.20 that must be spent on rent or mortgage interests and utilities for the business. You must document and be able to prove these expenses to request forgiveness.
Other Allowable Expenses
At least 75% of the PPP loan must be spent on payroll. In the case of a self employed person, this threshold is easily met because 8 weeks of net income is automatically applied to your salary (aka payroll). If you take the max PPP loan you can get, you’ll have to spend the remaining balance of the loan (after taking your salary) on rent or mortgage interests and utilities for the business.
Non-Allowable Expenses
If you spend your PPP loan on anything other than allowable expenses, you’ll have to repay it...so don’t. Take a loan in the amount of your Owner Compensation Replacement (fully forgivable without documentation) or a smaller loan that you can more easily spend on allowable expenses. If for some reason you move forward with taking a PPP loan and spend it on unallowable expenses, that loan is deferred for a year and then payable within two years of receipt at 1% interest.
Documenting Expenses
You’re only required to document:
Mortgage interest—as long as the mortgage was signed before February 15, 2020
Rent—as long as the lease agreement was in effect before February 15, 2020
Utilities—as long as service began before February 15, 2020
Any payments using PPP funds on mortgage, lease or utility contracts dated after February 15, 2020 are ineligible for loan forgiveness and must be paid back.
The simplest way to document these expenses is to pay them out of the same account you where your PPP loan was deposited.
Requesting Loan Forgiveness
The SBA has released its application for loan forgiveness. You can access it here.
Free Technical Assistance
Tullis Consulting & Financial Services LLC offers free support to small business owners applying for COVID-19 related loans and grants. Contact us for more information: contact@tullisconsulting.com