Business Owners: Are You Leaving PPP Money on the Table?

Monday, February 22nd President Biden announced changes to the Small Business Association (SBA) coronavirus relief program that established a 14-day, exclusive PPP loan application period for businesses and nonprofits with fewer than 20 employees from February 24th to March 9th 2021 (while open to all other eligible entities beginning March 10th through May 31st (Recent Update – was March 31st)).

While there is eligibility for those who have taken First Draw PPP Loans to be eligible for Second Draw PPP Loans, this post is to focused on First Draw PPP Loans. First Draw PPP Loans can be used to help fund payroll costs, rent, utilities, costs related to COVID-19, business software, human resources, sales & billing functions, etc. To qualify for the loan, you must have been affected by COVID-19 and meet the following conditions:

• Be self-employed, independent contractor, or sole proprietor.
• Any small business concern that meets SBA’s size standard (Industry specific or alterative size standard).
• Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans’ organization, or tribal business concern of the Small Business Act with the greater of:
  • 500 employees, or
  • That meets the SBA industry size standard if more than 500
• Any business with a NAICS code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location.

Given you qualify, the loan details are as follows:

• PPP loans have a 1% interest rate
• Loans issued after June 5, 2020 have a maturity of 5 years (prior issued PPP loans have a 2-year maturity)
• No collateral or personal guarantees are required
• Neither the government nor lenders will charge small businesses any fees
• Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrowers’ loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (between 8-24 weeks).

To add to this, the First Draw PPP Loan may be forgiven (meaning you do not have to pay the loan back) during the 8-24 week period if the following conditions are met:

• Employee and compensation levels are maintained
• The loan proceeds are spent on payroll costs and other eligible expenses
• At least 60% of the proceeds are spent on payroll costs

Now that we’ve looked into the PPP loan itself, how to qualify, and the potential for forgiveness, we would like to provide some insight into how business may begin to calculate their payroll costs to determine their eligibility for the PPP loan for each business entity type.

*Note: Our calculations are based off calendar year 2019. Although, when determining payroll costs you can use calendar year 2020 as well to calculate your First Draw PPP Loan amount.

Additionally, a more detailed and lengthy explanation of the eligibility rules for each business to qualify is described HERE.

Sole Proprietorship, Self-employed with employees, or you are an independent contractor:

• Step 1: Compute your 2019 payroll costs by adding the following:
  • 2019 IRS Form 1040 Schedule C line 7 gross revenue amount (As of 3/3/2021 – formerly net schedule C profit):
    • if this amount is over $100,000, reduce it to $100,000,
    • if this amount is less than zero, set this amount at zero;
  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, up to $100,000 per employee, which can be computed using:
    • 2019 IRS Form 941 Taxable Medicare wages & tips (line 5ccolumn 1) from each quarter,
    • Plus, any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, and
    • Minus (i) any amount paid to any individual employee in excess of $100,000, and (ii) any amounts paid to any employee whose principal place of residence is outside the United States.
  • 2019 employer contributions for employee group health, life, disability, vision, and dental insurance (the portion of IRS Form 1040 Schedule C line 14 attributable to those contributions); 4 If you are using 2020 payroll costs and have not yet completed a 2020 return, fill it out and compute the value. As of January 17, 2021
    • 2019 employer contributions to employee retirement plans (IRS Form 1040 Schedule C line 19); and
    • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).
  • Step 2: Calculate the average monthly net profit amount (divide amount from 1 by 12)
  • Step 3: Multiple the average monthly net profit amount from step 2 by 2.5.
  • Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between 1/31/2020 and 4/3/2020 that you seek to refinance. Don’t include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Partnership:

• Step 1: Compute 2019 payroll costs by adding the following:
  • 2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment of individual U.S.-based general partners that are subject to self-employment tax, multiplied by 0.9235, up to $100,000 per partner:
    • Compute the net earnings from self-employment of individual U.S.-based general partner that are subject to self-employment tax from box 14a of IRS Form 1065 Schedule K-1 and subtract (i) any section 179 expense deduction claimed in box 12; (ii) any unreimbursed partnership expenses claimed; and (iii) any depletion claimed on oil and gas properties;
      • if this amount is over $100,000, reduce it to $100,000;
      • if this amount is less than zero, set this amount at zero;
    • 2019 gross wages and tips paid to employees whose principal place of residence is in the United States (if any), up to $100,000 per employee, which can be computed using:
      • 2019 IRS Form 941 Taxable Medicare wages & tips (line 5ccolumn 1) from each quarter,
      • Plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, and
      • Minus any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is outside the United States;
      • 2019 employer contributions for employee (but not partner) group health, life, disability, vision, and dental insurance, if any (portion of IRS Form 1065 line 19 attributable to those contributions);
      • 2019 employer contributions to employee (but not partner) retirement plans, if any (IRS Form 1065 line 18); and
      • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms), if any.
    • Step 2: Calculate the average monthly net profit amount (divide amount from 1 by 12)
    • Step 3: Multiple the average monthly net profit amount from step 2 by 2.5.
    • Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between 1/31/2020 and 4/3/2020 that you seek to refinance. Don’t include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

S Corporations and C Corporations

• Step 1: Compute 2019 payroll costs by adding the following:
  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, up to $100,000 per employee, which can be computed using:
    • 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter
    • Plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips,
    • Minus (i) any amounts paid to any individual employee in excess of $100,000, and (ii) any amounts paid to any employee whose principal place of residence is outside the United States;
  • 2019 employer group health, life, disability, vision, and dental insurance contributions (portion of IRS Form 1120 line 24 or IRS Form 1120-S line 18 attributable to those contributions);
  • 2019 employer retirement contributions (IRS Form 1120 line 23 or IRS Form 1120-S line 17); and
  • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).
• Step 2: Calculate the average monthly net profit amount (divide amount from 1 by 12)
• Step 3: Multiple the average monthly net profit amount from step 2 by 2.5.
• Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between 1/31/2020 and 4/3/2020 that you seek to refinance. Don’t include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

As always, please feel free to schedule a call or reach out to us if you believe you are eligible for PPP loan and would like a second opinion – we’re here to help!