PPP Strategies for Small Business Owners
How To Make The Program Work For You
It has been over a year since COVID-19 changed many aspects of running a business, the Paycheck Protection Program being one of them. On December 27, a bill passed that changed the funding and structures surrounding the program Adams Brown offered some insights into the ever-changing program in a recent webinar.
More Financing Available Through Expanded Eligibility
When the new bill was passed on December 27, the eligibility was extended to those organizations who file as a 501(c)(6). There was also further clarification on applications for those who file a Schedule C. When this bill was first passed, the program was due to close on March 31. Recently, Biden signed the PPP Extension Act of 2021 which extended the deadline for applications for this program until May 31. and applications must be submitted to qualified lenders by that date or until funds run out. The program may close before the deadline seeing as there has been $5 billion worth of loans granted under this new program.
The Biden administration has tasked the Small Business Administration (SBA) with expanding the program to allow more targeted groups access to funding. There is now almost a year’s worth of data to see who’s applied for loans, who’s received them and who’s generated forgiveness. They have identified that minority-owned businesses and women-owned businesses have been underserved by this program, so the SBA has revisited the regulations to allow these types of Schedule C businesses to access these funds.
Making Your Application Calculations
Schedule C filers with no employees are now eligible to use their gross income to calculate their forgiveness or potential eligibility amount, which can be found on line 6 of your Schedule C.
Gross receipts and gross income have two separate definitions under this program.
- Gross receipts – what you’re using to calculate a 25% reduction if you’re applying for PPP loans
- Gross income – what you can borrow on your Schedule C or for your Schedule C
With no employees on your Schedule C, you will use line 7 of your schedule C in 2019 or 2020.
If you have employees on your Schedule C, this process will look a bit different. You will take that line 7 amount and subtract line 14 (employees benefit programs), line 19 (pension and profit-sharing plans) and line 26 (wages). This number will be what you can use up to $100,000 as what they will consider owner compensation. You will take this number as your total compensation and divide it by 12, then multiply by 2.5, and that’s what your loan would be. For restaurants and hospitality groups, you get to multiply by 3.5 on the new PPP program.
Nothing has changed on Schedule Fs, and this process is using the same regulations as the last program where you use your Schedule C using gross income or your gross income less the lines mentioned above. They are different line numbers, but the process to find the number is the same.
There have also been no changes for other entities.
The SBA has said you can use your net income as well. The difference between these numbers can be seen through the safe harbor modifications that came out under the new guidance rules. Every application for these programs has said you must have an economic necessity to warrant the need for these loans, but many had questions about how to prove you have an economic necessity. With research, the SBA came back and stated if your loan was $2 million or less, you qualify under economic necessity during this crisis. That means you don’t need to prove a need below this threshold. If your loan was over $2 million, you will fill out a questionnaire and supply documentation as to why this loan was necessary to keep your business in operation.
With the new regulations, if you use your Schedule C on your application and your gross income is more than $150,000, you are no longer under that safe harbor and you need to provide documentation to support your economic necessity to apply for that PPP loan. Otherwise, you fall under the old $2 million guidelines.
Eligibility Requirements Have Changed
Eligibility requirements for PPP applications have changed as well. One of the regulations stated that if you had a financial fraud related felony in the past five years, you were automatically ineligible. The SBA is not able to do full vetting of the loans, and this was a way to cut back on potential fraud or waste due to the loans being processed quickly. This requirement has not changed, but the only time a felony will disqualify a borrower is if the charge is fraud-related and financial, such as embezzlement or lying on a loan application.
Another requirement that has now been removed with this new update was the restriction on delinquent or defaulted student loans. Research showed that this requirement was a big hindrance on these individuals with small businesses applying for funding, and you are no longer disqualified for delinquent or defaulted student loans.
How You Can Spend the Money
The requirements have changed for what is covered under this program. Owner compensation is automatically forgiven when using net income as it’s assumed to be used for your payroll costs. When it comes to payroll, 60% of any PPP loan must be used on what is considered eligible payroll costs.
In order to obtain full forgiveness, the other 40% of PPP fund can be used on the other qualified expenses like:
- Owner compensation
- Payroll costs
- Mortgage interest, providing it was in place before the program began (Feb. 2020)
- Interest payments
- Covered operation expenditures can be broad but specific at the same time. Any business expenses for software or cloud computing services that facilitate the business operation such as accounting or HR tasks
- Covered property damage for any damage not covered by insurance. This may also cover damages due to protests.
- Covered supplier costs are for supplies necessary for running business. They must have been done before the start of your covered period unless it’s a perishable item (mostly applicable for restaurants).
- Covered worker protection expenditures, which include things like paying for PPE or costs from other guidelines put out by the CDC such as installing a drive-thru window
- Utility expenses including electricity, gas, water, telephone, internet access, etc. If you didn’t deduct these expenses on your 2019 or 2020 tax return, you cannot use those as a PPP expense.
New Application Forms Now Available
There are new applications for PPP 2.0, which is a second draw, as well as for a Schedule C using gross income. Both applications can be found on our website or on the SBA website. There are also updated PPP Forgiveness applications, so make sure that you are using the latest version of any application you’re filling out.
Apply for Forgiveness
Your first loan payments are probably coming up soon, so look into requesting forgiveness if you have not already. You have 10 months after the date of your coverage period ending to apply for forgiveness, so many of those dates are coming up in April or May. Don’t wait until the last minute, as the system may be bogged up and you want to get your questions answered before your first payment is due.
As the Paycheck Protection Program continues to take shape, make sure to stay in touch with your tax professional.