PPP Loan Information for the Public: Everything You Need to Know
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has been enacted to help small businesses across the United States, suffering due to the COVID-19 pandemic. The Paycheck Protection Program (PPP) is a part of this act, which provided much-needed financial relief to eligible businesses in the form of loans.
PPP loans were made available to businesses that had 500 or fewer employees, including sole proprietorships, independent contractors, self-employed individuals, 501(c)(3) nonprofit organizations, and certain veteran organizations, provided they met other eligibility criteria. The loan amounts were calculated as the lesser of 2.5 times of the average monthly payroll or $10 million.
The PPP loan has a 1% interest rate and a term of two years (or five years if taken out on or after June 5, 2020). The loan is forgivable if the borrower uses at least 60% of it for payroll expenses over eight to 24 weeks and spends the remaining amount on other eligible costs such as rent, mortgage interest, or utilities. Borrowers must maintain their pre-pandemic level of full-time equivalent employees and wages to receive full loan forgiveness.
Eligibility Requirements
To be eligible for a PPP loan, businesses must have been in operation as of February 15, 2020, and must have paid employees or independent contractors and have filed their 2019 taxes or 2020 taxes if they haven’t filed for 2019 yet. Moreover, the borrower must certify that “current economic uncertainty makes this loan necessary to support the ongoing operations of the applicant.” This certification has been clarified and expanded. Borrowers taking out loans of less than $2 million are assumed to have made the necessity certification in good faith. Loans over $2 million will be subject to review and cannot be completely forgiven without meeting specific criteria.
While the program’s original end date was June 30, 2020, Congress has extended the deadline to apply for a PPP loan multiple times, and the last day to apply now is May 31, 2021.
Usage Guidelines
PPP loans were intended to provide relief to small businesses that were severely impacted by the pandemic. To maximize its benefits, businesses should carefully calculate the loan amount, follow the usage guidelines as closely as possible, and keep accurate records of how the funds were spent.
The loan forgiveness process is planned in two steps. First, borrowers need to apply for forgiveness with their lenders, submitting documentation to confirm that they used PPP funds for allowable expenses. And second, the lender is responsible for reviewing and calculating the amount eligible for forgiveness. Borrowers will hear back from their lenders after the review process decision.
Tax Implication
Initially, PPP loan forgiveness was not taxable. If you received loan forgiveness, this was not included in your taxable income. The Consolidated Appropriations Act in 2021, however, allows taxpayers to claim deductions for eligible expenses paid with forgiven PPP loans. This means that if you were eligible to itemize deductions, you could deduct covered expenses on your income tax return.
Conclusion
PPP loans provided immediate financial relief to small businesses struggling during the pandemic. The loan program has been extended multiple times, and furthermore, legislation has clarified some of the PPP loan rules to maximize the program’s benefits. Borrowers should also keep accurate records of how they use funds to assist with their PPP loan applications and forgiveness processes. Understanding this information will help small businesses navigate the uncharted territory created by the pandemic and be better prepared for reopening.
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