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PPP loans open Monday: Experts answer your biggest questions about applying

Published by Business Insider on Sat, 09 Jan 2021

<p><img src="https://static2.businessinsider.com/image/5ff8d7c6bde805001980bfee-2057/GettyImages-1230127147.jpg" border="0" alt="small business owner" data-mce-source="Erin Clark/The Boston Globe via Getty" data-mce-caption="Ralph Mercier, owner of Mercier's Salon, pauses from hanging up snowflakes in the window of his business in downtown Calais, Maine."></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>Starting next week, the Small Business Administration (SBA) will open applications for <a href="https://www.businessinsider.com/ppp-aid-for-small-businesses-whats-different-this-round-2020-12">the next round of Paycheck Protection Program loans</a>.&nbsp;</p><p>Certain lenders including community development financial institutions (<a href="https://ofn.org/cdfi-locator">searchable database here</a>) and minority depository institutions (<a href="https://www.fdic.gov/regulations/resources/minority/mdi.html">list here</a>), will be able to offer loans to first-time PPP borrowers on Monday and Tuesday, then to second-time borrowers on Wednesday. All other participating lenders will be able to process loans in the days following.&nbsp;</p><p><a href="https://www.businessinsider.com/how-to-get-ppp-funds-apply-forgiveness-2021-1">Insider held a webinar</a> to answer business owners' questions about getting loans. The live Q&amp;A filled up quickly before we could get to everyone's questions. Many people asked how to calculate payroll as a sole proprietorship, how loans will be forgiven, and how to document 25% revenue loss.&nbsp;</p><p>We submitted these questions to lawyers, accountants, lenders, and educators to get the answers you need ahead of the next round of PPP applications.&nbsp;</p><p>But first, we'll go over the basics.&nbsp;</p><p>Businesses that didn't receive PPP loans in the first round are still eligible to apply this time if they have 500 or fewer employees, while the <a href="https://www.businessinsider.com/how-minority-and-underserved-small-business-owners-can-get-ppp-2021-1">PPP "second draw" is geared toward smaller and harder-hit firms</a>.&nbsp;</p><p>Existing PPP borrowers can apply for a second loan if they have 300 or fewer employees and demonstrate at least a 25% loss in revenue in the first, second, or third quarter of 2020 relative to the same period in 2019. There are alternative calculations for seasonal businesses and businesses started after 2019. Businesses started later than February 15, 2020 or are publicly traded are not eligible.</p><p>Read more information on <a href="https://www.businessinsider.com/can-i-get-second-ppp-loan-how-business-owners-apply-2021-1">second-time borrowers here</a> and <a href="https://www.businessinsider.com/how-to-qualify-ppp-business-loans-stimulus-2020-12">eligible businesses here</a>.&nbsp;</p><p>You can find the SBA's <a href="https://www.sba.gov/document/policy-guidance-ifr-paycheck-protection-program-ppp-second-draw-loans">official guidelines for second-time borrowers here</a>.&nbsp;</p><p>The deadline to apply is March 31, 2021, but funds will be allocated on a first-come-first-served basis.</p><p>Now, for your questions.&nbsp;</p><p><em>Some questions and answers have been edited and condensed for clarity. We'll continue to add responses as we receive them.</em></p><bi-shortcode id="table-of-contents" class="mceNonEditable" data-type="h2">Table of Contents: Static</bi-shortcode><h2><strong>Calculating payroll</strong></h2><h3>How do I calculate my payroll costs if I hire 1099 contractors but don't have W2 employees'</h3><p>"1099 employees do not count towards your payroll costs. They are eligible to apply for PPP loans independently. Salary that you pay yourself is eligible towards your payroll calculations." &nbsp;<em data-stringify-type="italic">Brock Blake, founder and CEO of small business loan marketplace Lendio</em></p><h3><strong>Can I cover new employees'&nbsp;</strong></h3><p>"Payroll for new employees hired in 2020 can be factored into the calculations for new PPP loans since the maximum loan amount is based on the allowable costs from the one-year prior to the loan. It is important to note that a first-time borrower has the option to use either 2019 or 2020 to calculate their maximum loan amount. This was done to ensure that first time borrowers are treated even-handedly." &nbsp;<em>Robbin Caruso, CPA and partner at Prager Metis</em></p><h3><strong>Are payroll costs for second loans measured over the same period as the first batch of PPP'</strong></h3><p>"The legislation allows businesses to choose between two periods for second loans. This is the same as the CARES Act so it should apply to both first and second draw loans: Multiply average gross monthly payroll cost for the one-year period before the date the loan is made by 2.5 or multiply average gross monthly payroll cost for 2019 or 2020 (borrower's choice) by 2.5."&nbsp;</p><p>"Businesses in the food and accommodation industries, with a NAICS code beginning in 72 can multiply by 3.5. In addition, there are alternative calculations for newer or seasonal businesses."<em>Gerri Detweiler, Education Director at Nav, a fintech company that matches small businesses with loans and credit cards</em></p><h2><strong>Operating a sole proprietorship&nbsp;</strong></h2><h3><strong>I am an LLC selling e-commerce online, I started my company in September 2020, and have no employees. Would I still qualify if I have no payroll'</strong></h3><p>"Current guidance from the SBA requires a business to have been in operation as of February 15, 2020, to qualify for PPP. Businesses started after that date are ineligible."<em>Brock Blake, founder and CEO of small business loan marketplace Lendio</em></p><h3><strong>I am a sole proprietor with a part-time employee. Does the amount I pay myself get calculated towards the 60% payroll of the PPP'</strong></h3><p>"Yes, it does. Qualifying salary for each individual is capped at $100,000 annually, so anything you pay yourself over that (prorated for the calculation period), won't be counted."<em>Brock Blake, founder and CEO of small business loan marketplace Lendio</em></p><h3><strong>If I'm self-employed, is it ok to use an estimated Schedule C for 2020 if that gives you a higher loan'</strong></h3><p>"Yes, effectively payroll costs are to be calculated using either estimated 2020 payroll costs or the 12 months preceding the loan." <em> Bruce Sacerdote, economist and professor at Dartmouth College</em></p><h3><strong>As a sole proprietor, would costs incurred for contractors be part of the 60% payroll expenses'</strong></h3><p>"It's not explicitly mentioned so I would guess no." <em> Bruce Sacerdote, economist and professor at Dartmouth College (Note: Paying yourself does count as payroll expenses as long as it's less than $100,000.)</em></p><h2><strong>Demonstrating revenue</strong></h2><h3><strong>To determine if there was a 25% reduction in revenue, do we do this comparison on a cash or accrual basis'</strong></h3><p>"The borrower will determine revenue for these purposes based on their gross receipts, defined as all revenue in whatever form received or accrued, according to the entity's accounting method." &nbsp;<em>Robbin Caruso, CPA and partner at Prager Metis</em></p><p>"You may use either quarter comparisons, or you may use 2020 annual compared to 2019. It also specifies that any forgiveness amount of a first-draw PPP loan that a borrower received in calendar year 2020 is excluded from a borrower's gross receipts."</p><p>"Generally, receipts are considered 'total income' (or in the case of a sole proprietorship, independent contractor, or self-employed individual 'gross income') plus 'cost of goods sold,' and excludes net capital gains or losses as these terms are defined and reported on IRS tax return forms." &nbsp;<em>Gerri Detweiler, Education Director at Nav</em></p><h3><strong>Are there specific documents I should provide to demonstrate the 25% reduction'</strong></h3><p>"The guidance says the business may use relevant tax forms (including annual tax forms), or if not available, a copy of the quarterly income statements or bank statements." &nbsp;<em>Gerri Detweiler, Education Director at Nav</em></p><h3><strong>What if payments were received in 2020 for services rendered in 2019' Can we prove this by the decline in services, since 2020 revenue was higher due to payments received the following year'</strong></h3><p>"Because the SBA language says received or accrued, it appears that the revenue does not have to hit the bank account to be considered received."<em>Gerri Detweiler, Education Director at Nav</em></p><h3><strong>I'm a 1099 agent. How do I show my income lost if I haven't received my 1099 to show the proof of loss of income from this year'</strong></h3><p>"Fortunately, the rules provide for the use of alternative records such as invoices because most people won't have 1099s available at the time they apply." <em> Bruce Sacerdote, economist and professor at Dartmouth College</em></p><h3><strong>Being a start up doing R&amp;D in 2019 and 2020, we are pre-revenue. Can I qualify for the PPP loan'</strong></h3><p>"If the 'entity' was organized in a corporate form, the payroll cost calculation likely works and there is no requirement to show a loss for a [first-draw] PPP loan. Note that additional facts are probably needed here."&nbsp;<em>Joseph Lynyak, financial services partner at Dorsey &amp; Whitney</em></p><h3><strong>Can I use Q4 2020 revenue vs Q4 2019 revenue if applying after January 1, 2021'</strong></h3><p>"The language of the Second Draw Act states that if the 'entity was not in business during 2019, but was in operation on February 15, 2020, had gross receipts during the second, third, or, only with respect to an application submitted on or after January 1, 2021, fourth quarter of 2020 that demonstrate not less than a 25% reduction from the gross receipts of the entity during the first quarter of 2020.'"</p><p>"Remember, the SBA has not yet issued regulations, but the above-quoted language appears to allow the use of 4th quarter 2020 results for calculation purposes."&nbsp; <em> Joseph Lynyak, financial services partner at Dorsey &amp; Whitney</em></p><h2><strong>Other general questions</strong></h2><h3><strong>Is rent a covered expense if it's paid to an affiliated company'</strong></h3><p>"My best understanding is that the rules for rent as a covered expense when paid to an affiliated company are consistent with the guidance from 'round one' of the Payroll Protection Program which only allowed for the interest component related to the rent to be included."<em>Robbin Caruso, CPA and partner at Prager Metis</em></p><h3><strong>Are banks incentivized to offer loans to those that only qualify for $15,000 and lower'</strong></h3><p>"A difficult questionit goes to whether a borrower has an established relationship with a bank because small loans may not be deemed profitable for a bank to deal with for an off-the-street applicant. Remember, however, that regular 7(a) loans and EIDL and other smaller SBA loan programs have also been enhanced. Also, as to the PPP, non-bank entities can qualify to be lendersso community development organizations may be available and willing to assist."<em>Joseph Lynyak, financial services partner at Dorsey &amp; Whitney</em></p><p><strong>SEE ALSO:&nbsp;<a href="https://www.businessinsider.com/can-i-get-second-ppp-loan-how-business-owners-apply-2021-1" >Business owners can get a 2nd PPP loan if they meet 6 criteria</a></strong></p><p><strong>SEE ALSO:&nbsp;<a href="https://www.businessinsider.com/how-small-businesses-can-access-ppp-loans-through-fintech-services-2020-4" >Businesses can get PPP through PayPal, Kabbage, Bluevine, or Quickbooksand they might be faster than your bank</a></strong></p><p><a href="https://www.businessinsider.com/ppp-how-to-apply-faq-experts-answer-paycheck-protection-program-loans#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/worlds-most-expensive-liquid-thoroughbred-horse-semen-2020-3">Why thoroughbred horse semen is the world's most expensive liquid</a></p>
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