Here’s how to get a forgivable loan, if you’re self employed, through the Paycheck Protection Program – also known as the PPP.
What’s the Paycheck Protection Program?
There’s a loan program offered because of the Cares Act called the PPP. When these funds are used properly, this loan is completely forgiven, which means you get to keep the money and don’t have to pay back any of it.
Initially, the rules were that you could use 75% of the loan amount to cover your average monthly payroll for a total of eight weeks and the other 25% of the loan could be used to cover approved business expenses during that same period. These included business rent payments, business utility payments, and interest on business mortgage payments.
The revised PPP loan rules allowed for a 24-week covered period to be used. In the case of self employed sole proprietors, 100% of the loan amount could be used as owner’s compensation. This would be the equivalent of ten weeks or 2.5 months of payroll.
How Do You Calculate Your PPP Loan Amount?
The SBA allows your lender to give you 2.5 times your average monthly payroll. First, we need to calculate your average monthly payroll. Even though you don’t technically have payroll, we still need to calculate this amount for the purpose of your PPP Loan.
Stay with me here because there’s a little math coming your way. Your average monthly payroll includes all your business net income. This means all the money, cash, 1099s, and everything you earn minus all your business expenses—everything you paid out and wrote off.
This net profit or income can be found on Line 31 of your 2019 1040 Form Schedule C.
Next, divide Line 31 by 12. That’s your average monthly payroll. Then, the SBA wants to give you a loan in the amount of 2.5 times your average monthly payroll. This calculation is your correct PPP loan amount.
I know that explaining math is confusing, so I’m here to offer a solution. I’ve created a Self Employed PPP Loan Amount Calculator that does all the calculations for you. Feel free to sign up for one, then make a copy for yourself.
How Do You Pay Yourself PPP Funds Properly?
I’ve dedicated an entire post to answer this question, so check that out when you’re ready.
The short answer is once this money is in your bank account, then you need to make at least one transfer to your personal account in the same amount you calculated earlier. That is the amount that will be forgiven.
I recommend multiple transfers to show the correct amount was used to cover ten weeks or 2.5 months of payroll during the covered period.
It’s also a very good idea to set up a separate, new bank account for these funds so that the accounting records are crystal clear. The government loves separate accounts for specific amounts, so your PPP money mixed in with all your other business expenses and income could be muddy when it comes to trying to get it all forgiven.
I suggest setting up a high interest savings account with a bank like CIT. Once the money is deposited, you can make transfers in the exact amounts for your payroll. This will be clearly displayed on your bank statements showing that you’ve paid yourself the correct amount of your PPP funds.
I mentioned earlier that other business expenses could also be forgiven. However, it turns out that these become a nightmare to document properly for the purposes of forgiveness. I suggest simply sticking to 100% owner’s compensation by electing the 24-week covered period.
I’m Worried About PPP Forgiveness
Hopefully, the same lender where you applied is going to process your PPP loan forgiveness. You have 24-weeks to use the funds. The covered period for any borrower will end no later than December 31, 2020.
Next, you have ten months after your coverage period ends to apply for PPP loan forgiveness. Interest of 1% accrues on your loan, yet you will owe nothing when your loan is fully forgiven.
The banks have 60 days to respond after you submit your request for loan forgiveness. Then, the SBA has an additional 90 days to determine if all or some of your loan gets forgiven.
There isn’t a prepayment penalty. If you have any funds left over that aren’t forgiven, then you can give them back. You may owe some interest though.
Overall, many banks are stalled on the forgiveness process because of the updates and rule changes. For example, there are three different forgiveness application forms now—Form 3508, the EZ form, and the S form.
Honestly, it’s best to wait and see if more changes are coming before applying for PPP loan forgiveness. If your numbers are correct, then your documentation will help you get full forgiveness when your lender and the SBA are finally ready.
Are PPP Funds Still Available?
Initial funds ran out very fast. Then, Congress added more funding. The original deadline to apply was June 30, 2020. However, that was extended until August 8, 2020.
Currently, you can no longer apply for a PPP Loan. However, there are talks of another round of PPP being offered.
How Can I Be Prepared for PPP 2?
When PPP 2 becomes available, you should apply as soon as possible before funds run out again. A couple of suggestions when applying—find a bank that is accepting applications in your local area. The big banks were limited to the amount of funding they could process the first time around.
This opened up the opportunity to go to your local bank or credit union and get your PPP application processed faster than with the big banks. Also, some online banks and financial technology companies like PayPal or Square were able to process applications.
Some banks were only working with people who were already customers, so consider developing a relationship with a bank you trust that has good customer service.
Documentation like your 2019 Schedule C, bank statements, profit & loss statements, and even your 2020 tax return might become important for getting PPP 2 funds. We don’t know for sure, but most likely you will have to show a loss using your business bookkeeping documents.
Okay, let’s recap. PPP funds are a forgivable loan program that can be used to cover your payroll for ten weeks or 2.5 months. While some of the funds can be used to cover other businesses expenses, stick with 100% owner’s compensation using the 24-week covered period.
I didn’t mention this earlier, but it’s a good idea for someone on unemployment to avoid using PPP funds at the exact same time. The SBA and most states haven’t offered guidance on this issue, but it would be prudent to avoid double-dipping these benefits at the same time.
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As always, I’m Rich and until next time.
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