What are Paycheck Protection Program (PPP) Loans?
The Paycheck Protection Program (PPP) loan is a type of SBA loan designed to provide funds to help small businesses impacted by COVID-19 to keep their workers on payroll. These loans may be completely forgiven if spent on eligible expenses (mainly payroll) during a specific time period.
Congress approved another $284 billion in funding for these loans in the stimulus bill enacted December 27, 2020. See below for more information on how to apply.
Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors.
As you read this, keep in mind that for the most part, the changes included in this legislation apply to all PPP loans except those already forgiven. In addition, the way the legislation is written, most provisions take effect immediately after the legislation is enacted, as if they were in the CARES Act that was passed March 27, 2020.
What kinds of PPP loans are available?
There is funding for three categories of PPP loans in this legislation:
- First time PPP loans for businesses who qualified under the CARES Act but did not get a loan (“first draw” PPP loans);
- Second draw PPP loans for businesses that obtained a PPP loan but need additional funding; and
- Additional funding for businesses that returned their first PPP loan or for certain businesses that did not get the full amount for which they qualified.
Certain news organizations, destination marketing organizations, housing cooperatives, and 501(c)(6) nonprofits may now also be eligible for PPP loans.
For all PPP loans, no collateral or personal guarantee is required. For these new loans, any amount not forgiven becomes a loan at 1% for five years. (Loans issued prior to June 5, 2020 have a maturity of two years.)
Who is eligible for the second draw PPP loans?
Many small businesses and independent contractors may be eligible for another PPP loan if they received a previous PPP loan, and qualify. First, similar to the first rounds of PPP, eligible small businesses may include:
- Small businesses, nonprofit organizations, veterans organizations, Tribal business concerns, and small agricultural cooperatives that meet the SBA size standards.
- Sole proprietors, self employed individuals or independent contractors.
In addition, applicants for second draw PPP loans must also meet the following criteria:
- The business may not have more than 300 employees and
- The business must have at least a 25% reduction in revenues in at least one quarter in 2020 when compared to previous quarters (more details below)
Businesses with multiple locations that qualified under the CARES Act may qualify for a second draw provided they employ fewer than 300 people in each location. Affiliation rule waivers from the CARES Act still apply.
Businesses must “have used or will use the full amount of the initial PPP loan for authorized purposes on or before the expected date of disbursement of the Second Draw PPP Loan.”
Certain types of businesses are not eligible including most businesses normally not eligible for SBA loans, businesses where the primary activity is lobbying, and businesses with certain ties to China. (Note the CARES Act made an exception for certain non-profits and agricultural cooperatives, for example, which are not normally eligible for SBA 7(a) loans.) Publicly traded companies are not eligible to receive second draw PPP loans.
How is the 25% reduction in revenues calculated?
Business owners will compare gross receipts (see definition below) of the business for any quarter in 2020 to the same quarter in 2019 to determine if revenues decreased by at least 25%.
Remember, this calculation applies to second draw PPP loans, not to first draw PPP loans.
What if you weren’t in business all of 2019? Stick with us. This sounds more complicated than really is:
If you were not in business during the first or second quarter of 2019 but were in business in the third and fourth quarter of 2019, then you may compare any quarter in 2020 with the third or fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
If you were not in business during the first or second quarter or third quarter of 2019 but were in business in the fourth quarter of 2019, then you may compare any quarter in 2020 with the fourth quarter of 2019 to determine whether gross receipts were reduced by at least 25%.
A business must have been in business by Feb. 15, 2020 to apply. A business that wasn’t in business in 2019 but was in business before February 15, 2020 will compare gross receipts from the second, third or fourth quarter of 2020 to that first quarter of 2020.
Some business owners that operate on a fiscal basis have asked about using non-calendar quarters. According to SBA guidance, businesses that use a fiscal year to file taxes may document a reduction in gross receipts with income tax returns only if their fiscal year contains all of the second, third, and fourth quarters of the calendar year (i.e., have a fiscal year start date of February 1, March 1, or April 1).
Also note that for nonprofits and veteran’s organizations, the term gross receipts has the same definition as gross receipts under section 6033 of the Internal Revenue Code of 1986.
In addition, there is a simplified calculation that allows the business to compare annual revenue losses. If you were in business for all four quarters of 2019 you will be eligible to compare your annual receipts from 2019 to 2020 to demonstrate the 25 percent revenue reduction, and you will provide annual tax return forms as documentation.
For loans of up to $150,000 you can simply certify your revenue loss when you apply, but on or before you apply for forgiveness you will have to produce documentation of that revenue loss.
To document revenue loss, the SBA says businesses may use one of the following:
- Quarterly financial statements. If the financial statements are not audited, the applicant must sign and date the first page of the financial statement and initial all other pages, attesting to their accuracy. If the financial statements do not specifically identify the line item(s) that constitute gross receipts, the applicant must annotate which line item(s) constitute gross receipts.
- Quarterly or monthly bank statements showing deposits from the relevant quarters. If it is not clear which deposits listed on the bank statement constitute gross receipts (e.g., payments for purchases of goods and services) and which do not (e.g., capital infusions), the business must annotate them.
- Annual IRS income tax filings (required if using an annual reference period). If the entity has not yet filed a tax return for 2020, the applicant must fill out the return forms, compute the relevant gross receipts value and sign and date the return, attesting that the values that enter into the gross receipts computation are the same values that will be filed on the entity’s tax return.
What are gross receipts?
The guidance from the SBA defines gross receipts for for-profit businesses as follows:
“All revenue in whatever form received or accrued (in accordance with the entity’s accounting method) from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. Generally, receipts are considered “total income” (or in the case of a sole proprietorship, independent contractor, or self-employed individual “gross income”) plus “cost of goods sold,” and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms.
Gross receipts do not include the following:
- taxes collected for and remitted to a taxing authority if included in gross or total income (such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees);
- proceeds from transactions between a concern and its domestic or foreign affiliates; and
- amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker.
All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer’s request, investment income, and employee-based costs such as payroll taxes, may not be excluded from gross receipts.”
The amount of any forgiven first draw PPP Loan or an EIDL advance (grant) is not included in a borrower’s gross receipts.
Also note that for nonprofits and veteran’s organizations, the term gross receipts has the same definition as gross receipts under section 6033 of the Internal Revenue Code of 1986.
How much can I get with a second draw PPP loan?
The maximum loan amounts for second draw loans is $2 million. In all the examples below, the loan amount caps out at $2 million. Businesses that are part of a single corporate group can’t receive more than $4,000,000 of Second Draw PPP Loans total. An eligible entity may receive only one second draw loan.
As before, a business may qualify for up to 2.5 times average monthly payroll costs. (To get the average gross monthly payroll cost you’ll total each month’s payroll costs and divide by 12.)
You can arrive at this figure either by one of two methods— your choice (except businesses with a NAICS code beginning in 72 – see below):
- Multiply average gross monthly payroll cost for the 1-year period before the date the loan is made by 2.5 or
- Multiply average gross monthly payroll cost for 2019 or 2020 (borrower’s choice) by 2.5.
New businesses (that were not in business for the 1-year period preceding February 15, 2020) will use a slightly different formula to arrive at the average monthly payroll costs. They will divide the payroll costs paid or incurred by the date they apply by the number of months in which those costs were incurred and multiply the result by 2.5 (or 3.5 for businesses with NAICS code starting with 72). Again, new businesses must have been in business by February 15, 2020 in order to be eligible.
Businesses with a NAICS code beginning in 72 (generally hospitality businesses) may receive up to 3.5 times average monthly payroll cost using their choice of these two methods:
- Multiply average gross monthly payroll cost for the 1-year period before the loan is made by 3.5 or
- Multiply average gross monthly payroll cost for 2019 or 2020 (borrower’s choice) by 3.5.
Seasonal businesses may apply based on the average monthly payroll costs for any 12-week period between February 15, 2019 and February 15, 2020. (See the definition of a seasonal business below.)
Note that all of these methods allow the business to use payroll costs incurred or paid during the applicable time period. (You may incur a payroll cost but not actually pay it until the pay period.)
What is a seasonal employer?
A seasonal employer is defined as one that:
- “Does not operate for more than 7 months in any calendar year; or
- During the preceding calendar year, had gross receipts for any 6 months of that year that were not more than 33.33 percent of the gross receipts of the employer for the other 6 months of that year’’.
What counts as payroll?
Payroll is the same as defined in the CARES Act with one new addition (noted below):
- Salary, wages, commissions or similar compensation,
- Payment of cash tips or equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips),
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provisions of employee benefits including insurance premiums (employer cost);
- Payment of any retirement benefit (employer cost);
- Payment of State or local tax assessed on the compensation of employees.
- New: group benefits are defined to include group life, disability, vision, or dental insurance
It does not include:
- The compensation paid to an employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred.
- Any compensation of an employee whose principal place of residence is outside the United States;
- Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
- Do not include amounts paid to 1099 contractors in payroll; they may apply on their own.
Self-employed? Independent contractors and the self-employed with no employees may qualify based on 2.5 months of net profit (capped at $100,000) on their Schedule C tax form (line 31) for 2019 or 2020. As of March 3, 2021, self-employed applicants may alternatively choose to use gross income (line 7) on their Schedule C. (Second draw PPP loan borrowers may use 3.5 times net profit or gross income if the business NAICS code begins in 72.) There is also a new alternative calculation for self-employed Schedule C filers with employees. The new calculations only apply to businesses whose PPP loan applications have not already been approved.
Individual partners in a partnership do not apply on their own. The payroll calculation for partnerships is found in this guidance.
What if I didn’t get a PPP loan before?
There is funding for “first draw” PPP loans and you can apply on terms similar to the original CARES Act. You do not have to demonstrate the 25% revenue loss for a first-time loan, and your business may qualify if it has more than 300 employees, provided it qualifies based on the previous CARES Act rules. Read details of those loans here.
What if I have unpaid student loan debt?
In order to expand small business access to the PPP, the SBA, in consultation with Treasury, has decided to eliminate the restriction on PPP qualification to those with past due or defaulted Federal student loans.
“This change will make PPP loans available to more borrowers with financial need and is consistent with Congress’s intent that PPP loans be prioritized for small business concerns owned and controlled by socially and economically disadvantaged individuals as defined in section 8(d)(3)(c) of the Small Business Act.”
According to the Department of Education, “Black and Brown students rely more heavily on student loan debt than their peers and experience delinquency at disproportionately high rates. As a result prohibiting delinquent student loan borrowers from obtaining PPP loans is more likely to exclude business owners of color from access to the loans they need.”
What if I have a previous felony conviction?
Previously, a felony conviction or indictment in the past year would have excluded any business owner with 20% or greater interest in the company and their business from participating in the PPP. The SBA has revised the previous restriction, making it possible for a business owner with a non-financial fraud felony conviction to apply for and obtain a PPP loan.
The restriction still applies to any PPP loan applicant convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for a felony involving financial fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years.
Can I get more money from my first PPP loan?
You may, if you qualify and SBA has not remitted a forgiveness payment to the lender on that loan. There are specific circumstances under which you may request an increase in your first draw PPP loan and you must work with the “lender of record” (the one who made the first loan).
If you returned all or part of your PPP loan, you may apply for an “amount equal to the difference between the amount retained and the maximum amount applicable.” Or, if you did not accept the full amount you may request a modification to allow you to borrow the full amount for which your business is eligible.
Partnerships that applied based on the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation or seasonal businesses that may have qualified for a larger loan by using the average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020 may also apply for the difference.
Note: if you are self-employed and file Schedule C and your PPP loan was already approved, you may not reapply based on the new gross income calculation.
Is there loan forgiveness for the new PPP loans?
Yes! As with the first round of PPP, these loans may be entirely forgiven if spent for the proper purposes (primarily payroll) during the proper time period. Keep in mind you will apply for forgiveness with the lender who gave you your PPP loan. They may use an online application form.
Currently, there are three PPP loan forgiveness applications:
- Form 3508
- Form 3508EZ
- Form 3508S
From 3508S is a simplified form that previously was available for loans of $50,000 or less. Now it covers loans of $150,000 or less. It requires the borrower to:
- Describe the number of employees retained due to the PPP loan,
- The estimated amount of the loan proceeds spent on payroll, and
- The total amount of the loan
The borrower will have to certify they have complied with the requirements of the loan and retain records to prove compliance. (Employment related records must be retained for four years while others must be retained for three years.)
We recommend considering opening a separate bank account to deposit your PPP funds and track expenditures.
How must I spend the money?
Similar to the first round of PPP, this program is primarily intended to keep employees (including the business owner or independent contractor) on payroll and to pay other specific expenses.
To obtain full forgiveness, borrowers will need to spend at least 60% of loan proceeds on qualified payroll expenses during the covered period. Eligible nonpayroll costs cannot exceed 40 percent of the loan forgiveness amount. The list of eligible non-payroll expenses has been expanded and now includes:
- Mortgage interest
- Covered operations expenditure*
- Covered property damage cost*
- Covered supplier cost*
- Covered worker protection expenditure*
Covered operations expenditures means “payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses”
Covered property damage cost means “a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation;”
Covered supplier cost means “an expenditure made by an entity to a supplier of goods for the supply of goods that:
- Are essential to the operations of the entity at the time at which the expenditure is made; and
- is made pursuant to a contract, order, or purchase order— ‘‘(i) in effect at any time before the covered period with respect to the applicable covered loan; or ‘(ii) with respect to perishable goods, in effect before or at any time during the covered period”
Covered worker protection expenditure means “an operating or a capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency declared by the President under the National Emergencies Act (50 U.S.C. 1601 et 8 seq.) with respect to the Coronavirus Disease 2019 (COVID–19) expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19; may include the purchase, maintenance, or renovation of assets that create or expand
- a drive-through window facility;
- an indoor, outdoor, or combined air or air pressure ventilation or filtration system;
- a physical barrier such as a sneeze guard;
- an expansion of additional indoor, outdoor, or combined business space;
- an onsite or offsite health screening capability; or
- other assets relating to the compliance with the requirements or guidance described in subparagraph (A) as determined by the (SBA) Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; the purchase of—
- covered materials described in section 328.103(a) of title 44, Code 16 of Federal Regulations, or any successor regulation;
- particulate filtering face piece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or
- other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of 4 Labor; and does not include residential real property or intangible property;’’
(*Note these new covered expenses apply to any PPP loan except those already forgiven).
The “covered period” is the specific period of time in which you must spend the funds. It starts when the PPP loan is originated. (That’s the date the funds are deposited to your bank account.) You can choose a covered period of 8 to 24 weeks after the loan is disbursed to spend the funds.
Forgiveness can be complex so make sure you read the guidance from the SBA (SBA.gov/ppp) carefully and consult with your legal or tax advisors as soon as possible.
Will an EIDL Grant be subtracted from my PPP for loan forgiveness?
No. The legislation repeals the requirement that an EIDL grant (advance) be deducted for purposes of PPP forgiveness. In addition, the SBA Administrator is required within 15 days of when this legislation is enacted to “ensure equal treatment” for borrowers whose loans have already been forgiven and who had their grants subtracted from the forgiven amount.
Where can I get one of the new PPP loans?
These loans are made by lenders approved by the SBA. Nav matches borrowers to PPP lending partners making these loans. Sign up for a free Nav account to be matched to a lender.
What else do I need to know?
There are a few other details that are helpful to understand. As with the CARES Act:
- No credit check is required. A few PPP lenders did check applicant’s personal credit in the first round of PPP, so if this is of concern, be sure to ask before you apply.
- There is no personal guarantee.
- Normal SBA collateral requirements are waived.
How do I apply for one of these PPP loans?
Lenders approved by the SBA will make these loans. You can view the first draw PPP loan application here and the second draw PPP loan application here. Keep in mind however, that you will submit your application through your lender who likely will require you to fill out an application online. Reviewing the application may help you understand what will be required to qualify.
You’ll need to submit the following information with the application:
If you are not self-employed, Form 941 (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate payroll), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions. A partnership must also include its IRS Form 1065 K-1s.
If you are self-employed with no employees, IRS Form 1040 Schedule C (whichever was used to calculate loan amount); documentation that you are self-employed (such as IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed); and a 2020 invoice, bank statement, or book of record to establish that the applicant was in operation on or around February 15, 2020.
If you are self-employed with employees, your 2019 or 2020 IRS Form 1040 Schedule C (whichever was used to calculate loan amount), Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever was used to calculate loan amount), as applicable, or equivalent payroll processor records, along with evidence of any retirement and employee group health, life, disability, vision and dental insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the applicant was in operation on February 15, 2020.
For all of these borrowers, you do not have to include documentation of your reduction of revenues if the loan amount is less than $150,000, but you will have to submit it when you apply for forgiveness.
If the loan amount is greater than $150,000, then you will have to submit documentation of the reduction in revenues, which may include documentation sufficient to establish that your business experienced a 25% reduction in revenue, which may include relevant tax forms (including annual tax forms), or if not available, a copy of the quarterly income statements or bank statements.
(If you are applying for a second draw PPP loan with the first lender that processed your first draw loan you don’t need to include duplicate information already submitted.)
For a second draw PPP loan, you must enter the SBA loan number of your First Draw PPP loan (the first PPP loan you obtained) when you apply. SBA loan numbers have the following format to help borrowers identify the SBA loan number of their first PPP loan: XXXXXXXX-XX (i.e. eight numbers followed by a dash and then two more numbers). If you don’t have this information, check with the lender of your first PPP loan.
Nav matches business owners to lending partners making these loans.
What other help is available for my small business?
In addition to the new PPP loans, the Act authorizes the following relief:
- Another $20 billion in funding for targeted EIDL grants and additional funding for EIDL loans.
- Pandemic unemployment benefits for the self-employed and independent contractors will be extended.
- Payment relief for eligible SBA loans will be extended. That means the SBA will cover the payment on eligible SBA loans—including interest, for up to a total of $9000 per payment—for another 3 months, and up to 8 months for certain disadvantaged borrowers.
- Funding ($12 billion) will be available for Community Development Institutions and Minority Development Institutions which in turn will help minority and low-income small business owners through a new Neighborhood Capital Investment program.
- Live venues, independent movie theaters, and cultural institutions may be eligible for $15 billion in dedicated grants.
We will continue to delve into this legislation and provide additional insights by updating this article.