What is the Paycheck Protection Program?
The re-authorizing of the Paycheck Protection Program (PPP) gives businesses funding in the latest relief package. The Paycheck Protection Program is a loan program that originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the first stimulus. The Small Business Administration, which manages the program, says it will be using a new system that it hopes will allow it to keep pace with the demand.
On December 27, 2020, the second stimulus package was signed with an additional $285 billion in funding, and updated the eligible expenses. It also opened a second PPP loan for businesses that used up their first PPP loan, and have experienced a 25% or a more significant decrease in revenue. An expanded range of eligible organizations will be able to apply for a second PPP loan, this time up to a maximum of $2m, down from the previous limit of $10m.
The following is a high-level overview of the PPP loan program. All small businesses are eligible:
- The loan has a maturity rate of two years and an interest rate of 1%.
- Loans made after June 5, 2020, have a length of five years.
- The loan covers expenses for 24 weeks starting from the loan disbursement date.
- No need to make loan payments until either your forgiveness application is processed, or ten months after your 24-week covered period ends.
- No collateral or personal guarantees required.
- No fees.
How much could you receive?
The loan can be forgiven and essentially turn into a non-taxable grant.
- First-time borrowers are eligible for 2.5 times their average monthly payroll cost, up to $10 million.
- For sole proprietors, the calculation is different. They can borrow 2.5 times the monthly profit they reported on their 2019 Schedule C tax form.
- $2 million is the loan cap for second-time borrowers.
Are you eligible for a PPP loan?
Businesses will need to show a 25% or more significant reduction in revenue. Comparing your income between any quarter in 2020 with the same quarter in 2019, will be the determining factor for small businesses, sole proprietorships, independent contractors, and self-employed individuals who are all eligible.
- Sole proprietorships will need to submit a Schedule C from their tax return filed (or to be filed) showing the sole proprietorship’s net profit.
- Independent contractors will need to submit Form 1099-MISC (now 1099-NEC in 2020) in addition to their Schedule C.
- Self-employed individuals will need to submit payroll tax filings reported to the Internal Revenue Service.
How can you use your PPP loan?
Sixty percent of your PPP loan must fund payroll and employee benefits costs.
You can spend the remaining 40 percent on:
- Mortgage interest payments.
- Rent and lease payments.
- Operations expenditures that keep your organization running.
- Any property damages that are covered by insurance.
- Supply chain costs that represent your cost of goods sold.
- Worker protection expenditures to be COVID compliant.
The resurrection of the Paycheck Protection Program attempts to keep you from laying off workers. The PPP was the single largest source of support for the economy for April. In that same month, the economy shed 20 million jobs. It is difficult to imagine how much worse this may have been without the SBA’s prompt intervention, although one MIT paper estimates that as of the first week of June, the PPP had saved 2.3 million jobs.
Despite the PPP’s enormous success, it is unclear if the amount enacted will be enough to have the same effect now on saving millions of jobs.
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