FAQ about the PPP loan with an accountant from Edgewood Business Solutions.
The other day I had a hairstylist friend tell me she was told that she couldn't apply for the PPP loan because she didn't have employees. I told her this is NOT true and she needs to apply ASAP before the deadline. This got me thinking about all the other people in the dark about how this loan can HELP you and also be completely FORGIVEN! My friend even told me she isn't even getting unemployment anymore, the PPP loan is the only lifeline she has. Knowledge is power, and we need to take our power and get all the funding we can while most business in California is still closed and business is still not how it used to be.
I am so thankful that, Katie an accountant from Edgewood Business solutions, www.edgysolutions.com, reached out to me and offered to help answer some frequently asked questions.
Best place to apply for a PPP loan?
This is a great question because who you apply through can make a huge difference on your chances of receiving a PPP loan. Banks typically require that you have an existing relationship/account with them in order to be able to apply for a PPP through them. The best banks to apply through are the smaller community banks because the big banks (Bank of America, Wells Fargo, etc.) prioritize their wealthiest clients first and the smallest businesses often get overlooked. If you only have an account with a big bank, you can still apply through them or you can apply through a fintech company like Bluevine, Veem, or Fundera. If your bookkeeper or CPA has a relationship with a community bank you can ask them to assist you with a banking referral.
How do you know how much you can get approved for?
In general, borrowers can apply for 2.5x their monthly payroll costs. Borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019 (gross wages, state unemployment tax, employer health care premiums and employer retirement plan contributions). Take the aggregate amount, less any wages for any employee above 100k then take the net number, divide by 12 and then multiply by 2.5. If the business does not have employees, but files a schedule C with their tax return, they can use the net income and the same formula (take the net income up to 100k, divide by 12 and then multiply by 2.5). Partnerships have a different calculation utilizing their K1. The good news is that most banks have applications that will guide you through these calculations. The fintech companies have easy to follow online questionnaires that will calculate the amounts when you answer specific questions.
How do you qualify for 100% forgiveness?
To qualify for 100% forgiveness, at least 60% of the funds must have been used for payroll costs. Payroll costs generally include: employee gross pay including salary, wages, commissions, bonuses, and tips, capped at the annualized value of $100,000, employer paid state and local taxes assessed on employee compensation, and the cost of employee benefits, including costs for group health care benefits like insurance premiums; payment of any retirement benefits; and vacation, parental, family, medical, or sick leave; allowance for separation or dismissal.
Up to 40% can be used for business rent or lease costs, business mortgage interest, and utilities. Additionally - 100% of these funds must be spent during the “covered period” in order to qualify for forgiveness.
When do I have to spend the PPP funds? What is the “covered period?”
In order to qualify for forgiveness, the PPP funds you receive must be spent during your covered period. Borrowers have two options for the covered period: they can choose an 8 week period or a 24 week period. The covered period starts on the date your lender issues the disbursement of your PPP loan.
Something to keep in mind when choosing which covered period you want to go with is the maximum compensation amount allowable. The maximum amount of compensation that can be counted towards forgiveness for an individual with any ownership interest in an S corporation, C corporation, partnership or sole proprietorship (Schedule C business) cannot exceed the lesser of $20,833 or 20.833% of their 2019 compensation; this cap applies cumulatively to all companies that the owner is paid by. The $20,833 / 20.833% presumes a covered period of 10.6 weeks or more. A borrower that elects to use an 8 week covered period will be limited to the lesser of $15,385 or 15.385%.
When do you start paying the unforgiven portion of the PPP loan back?
Payments on any unforgiven portion of your PPP loan are deferred 10 months from the date of funding. The original payment deferment was 6 months but the guidelines have since changed. Interest begins accruing as of the funding date, but you will only be responsible for interest on any unforgiven portion.
Will you be taxed on the loan? If so, is it just on the part that isn't forgiven?
You will not be taxed on the loan funds, but you will also not be able to claim deductions for any of the funds spent. It is safe to assume at this point that you will be taxed on the deduction amount you cannot claim. This will be different for each company depending on their net income, but it is important to discuss this with your CPA and bookkeeper so that you are prepared to pay additional taxes. Even if you end up having to pay tax on these funds, there is a huge benefit in receiving the funds in the first place, so we don’t want this to discourage anyone. In addition, there is pending legislation that may allow you to claim the deductions, but we are still awaiting this to be signed into law.
Can I qualify for full PPP forgiveness if I’ve received an EIDG?
If you received an EIDL Emergency Advance grant, commonly referred to as an EIDG, the amount of the EIDG you received will be an amount that will be unforgivable for your PPP loan. For example, if you received a $1,000 EIDG, you will now automatically not have forgiveness of $1,000 on your PPP loan.
Even if you are not interested in or ineligible for the PPP, we strongly encourage you to apply for an Economic Injury Disaster Loan through the SBA's website and check the box requesting the Emergency Advance. The Emergency Advance is a 100% forgivable grant in the amount of up to $10k and all businesses are eligible, even if you are denied the EIDL.
The difference between the PPP and the EIDG is that you can spend all of the EIDG funds on any of your business operations expenses and there is no percentage/requirement to achieve forgiveness; e.g. you could spend it all on business rent.
How should I be record keeping to make the loan forgiveness process easy?
For payroll costs: payroll registers and payroll tax returns may be requested. For the other costs, such as health insurance, rent, utilities and so forth: most often an invoice and canceled check or proof of payment will suffice. We recommend keeping the information digitally so it is easily accessible to upload or print. Lenders may ask for specific information so we recommend waiting for your lender to provide the list of documentation.
Can you be on unemployment and receive a PPP loan?
This has been debated and we recommend playing it safe. You can be on unemployment - we are assuming you a Sole Proprietor/Independent Contractor (Schedule C filer) in this situation - and still apply/receive a PPP loan. In this scenario we recommend choosing a 24 week covered period for forgiveness, and paying yourself from the PPP funds after you stop receiving unemployment. PPP funding is calculated as 2.5x your monthly compensation, which is approximately 10.5 weeks. So if you choose the 24 week covered period, you could take unemployment for the first 13.5 weeks, then stop your unemployment and use the next 10.5 weeks to pay yourself the PPP compensation to ensure that you will not have any issues for utilizing both benefits.
Can you be self employed and apply?
Absolutely! You will need to provide your 2019 Schedule C and must have net income to qualify, but keep in mind there is a cap of 100k for gross income calculation.
What forms/information do you need to turn into apply?
Each lender's forms are a bit different, but the form generally looks like this.
There are questions you’ll need to answer about yourself, your business, and you’ll need to provide documentation to support the “average monthly payroll” figure that you input on the PPP application. Examples of payroll documentation include: payroll tax forms 941, 944, or payroll summary reports from your payroll provider, IRS Form 1099-Misc, a business tax return, or an annual income and expense statement. Sole Proprietors must provide a 2019 Schedule C. It can be a draft schedule C but when it comes time for the application for forgiveness you will want to be sure that what you filed for net income on your tax return is either the same or more than what you requested for PPP; if the net income is significantly lower, you may not have all of the PPP forgiven.
How soon do you receive the money?
The lender must disburse the loan no later than 10 calendar days from the date of loan approval. Most lenders, especially the community banks, can receive SBA approval for your PPP loan either the same day as your application is accepted or the next day.
Do you think they will do another round of PPP loans?
We can’t say for sure but we hope they do. Because we don’t know yet, because we don’t know yet we highly recommend that you get your application in today!
Why do you think it is crucial for people to be getting these loans?
The businesses struggling the most right now are small businesses that don’t have access to reserve funds like big businesses do. These loans are literally lifelines for small businesses.
What other information can you share with someone who is thinking about applying for a PPP loan?
Don’t hesitate! Apply online or call your banker right now. If you receive the funds and then later feel that you do not need them, you can always pay the funds back. There is no penalty for early payment. But in all likelihood, you need that money for your small business so why wouldn’t you apply?!
What other information can you share with someone who has already applied for the loan?
The number one anxiety that our clients who received PPPs have right now is getting their loan forgiveness applications in. Our advice? Hold off! Do not apply for forgiveness just yet, for two reasons:
- The SBA is not even accepting forgiveness applications until August 10th, and it is likely this date will be pushed back. So while your lender may be supplying you with a forgiveness application, the SBA will not even look at it yet. And more importantly,
- There is legislation in the works that will likely pass (the HEALS Act) and would affect the loan forgiveness application process and forms. After the Act is signed into law, the SBA and U.S. Treasury will need to issue new guidance for PPP lenders and borrowers about loan forgiveness, which will take a couple weeks. It would be best to wait until all of this happens before applying for PPP loan forgiveness.
I want to say thank you so much to Katie for offering her assistance in this. She is an accountant over at Edgewood Business Solutions and is available for more questions and to help you with any accounting needs you may have. She let me know that Edgewood is a women owned financial services firm, started in 2011, based in California. They offer remote accounting, bookkeeping, and consultations. I plan on using their services in the future and am so happy I found them.
Edgewood Business Solutions contact information:
I just also wanted to remind you that you aren't alone in this and to SHARE this blog post with everyone you know who is self employed or a business owner. We can get through this, but only together. If you need anything feel free to DM as well.
The deadline is the 8th of August, BUT they are most likely going to release another PPP loan. If you didn't get in this time, you can do it next time. The procedure is most likely going to be the same, so you can work on having all the paperwork together now to be prepared.
I also am going to share the bank I went through to get my PPP loan, https://www.ccombank.com/, my dad also used them as well. They are super NICE, I had a friend reach out yesterday and they agreed to get her approved before the deadline. If you want the loan, call them NOW!
Wishing you the best!!