The Paycheck Protection Program (PPP) is free cash, up to $10 million for businesses with employees, and up to $20,833 for self-employed individuals. This article is an overview of the program. For helpful guides, application tutorials, and PPP calculators for every scenario, visit our PPP Resource Center.

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Overview

PPP (Paycheck Protection Program) is a fully forgivable loan, which means that at first it’s a loan and then once you spend the money in the correct manner and apply for forgiveness, you no longer have to repay the debt, so it’s essentially free money.

There was one round of PPP in the CARES Act from March 2020, and in the new Covid-Relief bill there is a second round of PPP. There are some differences between the two rounds of PPP (called “First Draw” and “Second Draw”).

Both the First and Second Draw offer the same thing: You get 2.5 months of payroll as a grant.

Take a year’s worth of payroll (for individuals without employees that can be your net income on line 31 of your Schedule C), divide it by 12, then times it by 2.5. That’s the amount of money you will get.

How To Apply

See our partner banks along with application tips for successful applications here

If you already got the First Draw, check if you are eligible for the Second Draw.

Eligibility

Fair warning: There are lots of details here. Confused? We can help!

You are eligible if:

• You have a business or non-profit
  or
• You are an independent contractor or self-employed or get a 1099 from your boss

You also must:

• Be in operation as of February 15, 2020 (e.g. began incurring operating expenses such as payroll or utilities, etc.). If you work on a 1099, then as long as you did any work before February 15, you are eligible.
• Be open, or temporarily closed. If you’re permanently closed, you are not eligible.
• Certify (state) that the business needs the loan.
• The funds are only for employees who reside in the United States (so a sole-prop residing out of the country is automatically not eligible). Employees out of the USA still count to the maximum.
• Business needs to have less than a certain amount of employees in order to be eligible:
  • First Draw: Max 500 employees in total. NAICS 72 max: 500 employees per location. Non-profits, housing cooperatives, and news organizations: max 300 employees.
  • Second Draw: Max 300 employees in total. Food industry max: 300 per location

First Draw PPP

Loan Amount

The PPP equals 2.5 months of payroll. You can choose which 12 months you want to use for the calculation – choose whichever is higher 🙂

• 2019 Payroll: Divided by 12, and multiply by 2.5
• 2020 Payroll: Divided by 12, and multiply by 2.5

Calculating Payroll

• Self-Employed Individuals 
  • 1099 Workers / Schedule C
    • Line 31 of Schedule C, (capped at $100k), divided by 12, times 2.5 (so maximum PPP amount would be $20,833)
    • You can use a draft Schedule C (2019 or 2020) if you have not yet filed your taxes.
  • Partnerships
    • K-1 1065 line 14, reduced by section 179 expense deduction, unreimbursed partnership expenses, and oil and gas properties depletion, multiplied by 92.35%, capped at $100k, divided by 12, times 2.5
    • Multiple partners should apply together.
    • You can use a draft K-1 1065 (2019 or 2020) if you have not yet filed your taxes.
• Businesses with Employees
  • Maximum PPP amount is $10 million – banks may cap it at a lower amount.
  • Average monthly payroll includes:
    • Salary, wages, commissions, tips, dismissal/separation pay, vacation pay, and sick leave (sick leave reimbursed via FFCRA is not eligible) capped at $100k per employee
    • employer-paid insurance (health, life, disability, vision, or dental) premiums
    • employer-paid retirement benefits
    • employer-paid state or local tax such as SUTA taxes

Second Draw PPP

In addition to the eligibility mentioned above, there are two more conditions for the Second Draw:

1. You had a 25% reduction in gross receipts (not profits)
2. You spent the PPP money already

25% Reduction

• Every three months is a quarter, so the four quarters are Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec.
• You need to have a 25% reduction in gross receipts during a quarter in 2020 compared to the same quarter in 2019. So as long as you had a 25% reduction in even one quarter, that makes you eligible (even if the other three quarters had an increase in 2020 compared to 2019).

If the business was in operation for the entire 2019, and had a 25% annual reduction in gross receipts from 2019 to 2020, the business is also eligible, being that a 25% reduction annually automatically means a 25% reduction in at least one quarter.

Proof of 25% Reduction

For loans under $150,000, you don’t need to show proof of reduction when applying for the loan. You can show proof later on when applying for forgiveness instead (though they may decide to waive the proof requirement altogether –  we’ll wait and see).

Gross Receipts Notes

• • Gross receipts does not include: PPP or other loans received.
  • For someone with a Schedule C, line 4+7 is your total “gross receipts”.

Spent Funds From First Draw

In order to be eligible for Second Draw PPP, you need to first have correctly used the funds from the First Draw and expect to have your loan forgiven.

You don’t need to have applied for forgiveness from First Draw before getting the Second Draw, but you do have to expect to receive forgiveness.

Loan Calculation

The PPP equals 2.5 months of payroll. You can choose which 12 months you want to use for the calculation – choose whichever is higher 🙂

1. 2019 Payroll: Divide by 12, and multiply by 2.5
2. 2020 Payroll: Divide by 12, and multiply by 2.5
3. 12-month payroll prior to loan application (e.g. if you apply in February 2021, you can use Feb 2020 – Jan 2021): Divide by 12, and multiply by 2.5

Self-employed individuals, both with and without employees, can use 2019 or 2020 (#1 and #2) but not 12 months prior to loan (#3).

• Self-Employed Individuals 
  • 1099 Workers / Schedule C
    • Line 31 of Schedule C, (capped at $100k), divided by 12, times 2.5 (so maximum PPP amount would be $20,833)
    • You can use a draft Schedule C (2019 or 2020) if you have not yet filed your taxes.
  • Partnerships
    • K-1 1065 line 14, reduced by section 179 expense deduction, unreimbursed partnership expenses, and oil and gas properties depletion, multiplied by 92.35%, capped at $100k, divided by 12, times 2.5
    • Multiple partners should apply together.
    • You can use a draft K-1 1065 (2019 or 2020) if you have not yet filed your taxes.
• Businesses with Employees
  • Maximum PPP amount is $2 million.
  • Average monthly payroll includes:
    • Salary, wages, commissions, tips, dismissal/separation pay, vacation pay, and sick leave (sick leave reimbursed via FFCRA is not eligible) capped at $100k per employee, Include salary/wages paid via PPP First Draw loan
    • Employer-paid insurance (health, life, disability, vision, or dental) premiums
    • Employer-paid retirement benefits
    • Employer-paid state or local tax such as SUTA taxes
• Food Industry
  • If the business is classified under NAICS 72 (hospitality or food establishment): average monthly payroll, multiply by 3.5, instead of 2.5
• Corporate Group Maximum
  • Businesses that are part of a single corporate group: max $4 million of Second Draw PPP Loans across all entities
  • Businesses that are part of a single corporate group: max $20 million of First Draw and Second Draw PPP Loans in total across all entities

Forgiveness – First and Second Draws

The PPP starts out as a 1% interest loan and then once you use the funds correctly, you can apply for forgiveness, thereby turning the loan into a grant (free money)!

When To Use The Funds?

You need to use the funds within the “covered period”.

Your covered period starts when you receive funding, and continues for a period between 8 and 24 weeks- you can choose how many weeks you need in excess of 8 weeks, but not more than 24 weeks. Remember, the shorter this period, the more wages you can potentially use for the ERC credit.

How To Use The Funds?

• Businesses with Employees: Spend at least 60% of loan proceeds toward payroll (as defined above) and at the most 40% towards other expenses.
• Self-Employed – No Employees: You don’t have to do anything to actually “use the funds”. If the PPP was deposited into your business bank account, simply transfer it to your personal bank account. You also have the option to use up to 40% on other expenses.

Other Expenses

• Rent or lease (e.g. warehouse, office – including home office, storefront, vehicle, and equipment)
  • Agreement in place before February 15, 2020
• Mortgage interest (real property and personal property)
  • Signed agreement before February 15, 2020
• Utilities (E.g. Electricity, gas, phone, internet, water, and transportation)
  • Service began before February 15, 2020
• Operation (Computer/cloud software that helps the business function)
• Property damage (vandalism or looting due to 2020 public disturbances)
• Supplier costs (owed to a supplier of goods)
  • For orders in effect prior to taking out the loan, or perishable items, during the covered period.
• Worker protection expenditures (expenses to help comply with Covid regulations)

Note: For loans over $50,000: do not reduce salary for employees earning less than $100k/annualized by more than 25%, and do not reduce FTE count.

Apply For Forgiveness

After completing your covered period and using all your funds correctly, apply for forgiveness with your bank.

Additional Notes

• Tax Benefit for PPP Funds
  • Businesses can deduct expenses paid with PPP funds, essentially creating a double-tax benefit
• EIDL Grant and PPP
  • EIDL grants received will not reduce PPP forgiveness total
• Benefiting From Both PPP and ERTC
  • Businesses can take advantage of both PPP loans and Employee Retention Tax Credit, as long as non-concurrent wages are used.
• Payroll Calculation For Businesses that Started after February 16, 2019
  • If the business was not in operation for one year prior to February 15, 2020, you can choose to sum all payroll available as per the above average monthly payroll rules, compute how many months you were in operation,  divide by number of months, and then multiply by 2.5
  • Example: Corporation A started operations on February 1, 2020, started payroll on April 1, 2020, and seeks to apply for a Round 2 PPP loan on February 1, 2021. Corporation A will sum payroll paid between April 1, 2020 and January 31, 2021, divide by 12 (total months in operation), and multiply by 2.5.
• Payroll Calculation For Seasonal Business
  • A “seasonal business” defined as operating for less than 7 months out of the year, or as earning less than 33% in 6 months of the year as compared to the other 6 months.
  • Must have been in operation for a minimum of 12 weeks between February 15, 2019 and February 15, 2020
  • Calculate the average total monthly payroll for any 12-week period (use a calculator!) between February 15, 2019 and February 15, 2020, and multiply by 2.5X.
  • Calculating this way can be very valuable to businesses (and self-employed individuals) who only operate for part of the year.
• PPP First Draw Increases
  • Partnerships that accidentally submitted an application with only one partner’s information (instead of all partners together), can now request an increase to include all partners.
  • If a borrower returned the entire disbursement of a First Draw PPP loan, the borrower can now reapply for First Draw PPP loan.
  • If a borrower returned part of a First Draw PPP loan, the borrower can now apply for the difference to increase their First Draw PPP loan.
  • If a borrower did not accept the full amount of their First Draw PPP loan, the borrower can now request the difference to increase their First Draw PPP loan.
• Calculating 25% Reduction For Businesses Not Open For The Entire 2019
  • If the entity was not in operation in Q1 or Q2 of 2019, but was in operation in Q3 and Q4 of 2019, the entity must calculate the 25% reduction in gross receipts by comparing Q1, Q2, Q3, or Q4 2020 to Q3 or Q4 2019.
  • If the entity was only in operation Q4 of 2019 (and not Q1, Q2, and Q3), the entity must calculate the 25% reduction in gross receipts by comparing Q1, Q2, Q3, or Q4 2020 to Q4 2019.
  • If the entity was not in operation in 2019, but was in operation as of February 15, 2020, the entity must calculate the 25% reduction in gross receipts by comparing Q2, Q3, or Q4 2020 to Q1 2020.

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Guidance from the SBA

Remember, during the first round of PPP they released quite a few “final rulings”

• Changes to PPP: Interim Final Rule on Paycheck Protection Program (1/7/2021 – updated on 01/14)
• Second Draw: Interim Final Rule – Full details (1/7/2021)  
• Second Draw: One-page Overview(1/8/2021)
• First Draw: One-page Overview (1/8/2021)
• Second Draw: How to Calculate 25% Reduction and Maximum PPP calculation (1/19/2021)
• First Draw: How to calculate maximum PPP amount (1/17/2021) 
• Loan Forgiveness Requirements (01/19/2021)

<Written in collaboration with ChaiPlus1>