Small and medium-sized businesses have immense contributions to the US economy, and it is clear that the COVID-19 pandemic has left most of them in financial despair. Therefore, it was critical to provide aid to struggling Small and medium-sized businesses.
In March 2020, the businesses got a relief following the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It brought the first round of Payroll Protection Program (PPP) loans. The law appropriated $349 billion to be used to support small businesses to maintain their payroll and some overhead expenses through the period of emergency. This was expanded in December 2020 with a second round of PPP funding.
Unfortunately, most of the small businesses faced challenges navigating an unclear loan and forgiveness process. Here we shed light on common questions and misconceptions about the PPP program.
What is a PPP loan?
It is a Small Business Administration (SBA) loan to help businesses retain their workforce during the COVID-19 pandemic. The SBA forgives the loan if the borrower adheres to the employee retention criteria and confines the funds' use to eligible expenditures.
How do I qualify for the second round of PPP funding?
The SBA issued guidance with steps on how to determine the maximum loan amount you are eligible to receive in for PPP funding.
How to calculate your max loan eligibility:
- Determine your payroll costs for the 12 months before your loan application or 2019, including only the employees a principal residential place in the United States.
- Deduct any amount remunerated to any employee above $100,000 on an annual basis.
- Divide the obtained amount in step two by 12 to get the average monthly payroll amount.
- Multiply the amount by 2.5
- Find out whether there is any outstanding amount of the Economic Injury Disaster Loan, paid between January 31 and April 3, 2020. If there is, add it to the amount you get on step four. However, you should not include the EIDL advance amount.
The figure you get after step five is the maximum PPP loan amount you can get.
What are the qualifying expenses?
The second round recognizes rent, covered mortgage interest, utilities, and payroll as qualifying expenses similar to the first round. Besides, the 60/40 rule is still applicable whereby during the covered period; a borrower has to use at least 60% of PPP loan funds on payroll costs to be eligible for loan forgiveness.
However, the second round of PPP funding comes with a few new expenses, which you should consider when determining how to divide up the PPP funds. For example, costs on worker protection and modification of facility to adhere to COVID-19 protocols.
What time period should borrowers use to calculate their maximum loan amounts?
Calculate by "calendar year" for 2019.
Does the new tax deduction rules apply to the first round of PPP funding?
Before, there was no claim of expenses paid for with PPP funds as deductions on income tax returns. But following the changes made by Congress in December 2020, expenses paid for with the round 2 PPP funds will be deductible from a business tax return. Note that the new tax deduction rule applies to the round one PPP funding.
Does taking out a payroll protection loan impact taxes?
The employer can subtract business expenditures paid with the PPP loan amount from their taxes.
Who qualifies for a second round loan?
Businesses who have used up their first PPP loan and were in operation prior to February 15, 2020, may be able to get a second round loan. These businesses must have no more than 300 employees, or no more than 300 employees per location. Additionally, they must show a 25% or greater reduction in gross revenue
What are the changes between the first and second round of PPP?
A major change to the second round of PPP is the distinction between the first and second draws. It means that some businesses that received a PPP loan in the first round can get a second one. But there are strict qualifications for the second draw.
• The business must have at most 300 employees.
• Any borrower applying for the second draw has to prove a gross receipts reduction of 25% or more between analogous quarters in 2019 and 2020.
• The PPP funds from round one have been or will be spent on approved expenses.
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