As part of its massive economic stimulus package, Congress created programs to help support small businesses that have been significantly affected by the corona virus pandemic.
One of those programs created through the CARES Act, the Paycheck Protection Program (PPP), proved to be so popular among small business owners that it ran out of money a few weeks after launching. Congress subsequently added more funds to the program, though, allowing even more small businesses to take advantage.
The PPP provides small business owners with the opportunity to apply for a low-interest loan that would provide funds to cover up to eight weeks of payroll costs including benefits. The amount of the loan that each company qualifies for depends solely on that company’s payroll costs.
The loan you’ll be eligible for is equal to 2.5 times your average monthly payroll, with a maximum loan amount of $10 million.
The best part about the program is the loan can convert to a fully-forgivable grant if the majority of funds are used to cover payroll expenses, with the rest going to help pay interest on mortgages, rent and utilities.
The PPP provides loans that are backed by the Small Business Administration. However, in order to receive a loan through the program, you need to apply through a financial institution that is offering the loans.
When you’re applying for any small business loan, it’s essential that you prepare the proper paperwork for the financial institution to review. With the PPP specifically, it’s even more important that you have your application paperwork in order, as the program is very popular and could run out of funds again without much notice. In addition, tracking how you spend the funds will be vital if you hope to get the loan forgiven.
Here are some of the documents you’ll need to gather to apply for the Paycheck Protection Program.
Corporations, General Partnerships, LLCs and Nonprofits
If your business falls into one of these organizational categories, you will need to provide:
- Color copy of your government-issued ID (back and front)
- Organizational documents, such as Articles of Incorporation
- 2019 IRS Form 940
- 2019 IRS Form W-3
You’ll also need to provide W-2s for any employees who earn more than $100,000 per year, or for any employees who live outside the United States.
Sole Proprietorship, Independent Contract, Self-employed, Single-member LLC
The great part about the PPP is it offers a lot of individuals the ability to apply for the loans as well. As gig workers and freelancers become the norm in today’s economy, this was really essential to help people who are hurting.
The documents you’ll need to apply for the PPP if you fall under one of these categories will depend on if you have employees.
If you do have employees, you’ll need:
- Color copy of your government-issued ID (back and front)
- 2019 1040 Schedule C
- 2019 IRS Form W-3
- 2019 IRS Form 940
- Payroll statement covering February 15, 2020
- W-2s for any employees earning more than $100,000 per year
If you do not have employees, you’ll need:
- Color copy of your government-issued ID (back and front)
- 2019 1040 Schedule C
- Proof of self-employment. For independent contractors, this can be a copy of your 1099-MISCs
- 2020 invoice, book of record or bank statement to prove you were operating as of February 15, 2020
The SBA requires a completed and filed 2019 1040 Schedule C to apply for a loan, as they won’t accept the form from previous tax years. In addition, if line 31 on your Schedule C shows less than $2,400, you will not be eligible for a loan under the PPP.
Additional Certifications
No matter what type of business you run, if you’re applying for a loan through the PPP, you must provide a “good faith certification” for four areas:
1.) The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations.
2.) The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease and utility payments.
3.) Borrower does not have an application pending for a loan duplicative of the purpose and amounts applied for here.
4.) From February 15, 2020, to December 31, 2020, the borrower has not received a loan duplicative of the purpose and amounts applied for here.
How to Get Your PPP Loan Forgiven
Having a low-interest loan is nice for companies that need help during these uncertain economic times. But the real draw to the PPP is the ability to not have to re-pay the loan at all, if you spend the funds appropriately.
Remember, 75% of the loan’s proceeds must be used to cover payroll if you want the loan forgiven. The other 25% can go toward expenses such as mortgage interest, rent and utilities for the business.
The key to getting your PPP loan forgiven will be taking detailed records of every dime you spend from the loan. Some general tips include:
- Create a spreadsheet to track the eight-week payroll expenses, as if it were a forecast of projected cash flow.
- Separate all employees who earn more than $100,000 out of this report, including any owner who takes a salary.
- Have other documentation such as bank statements to support these costs.
- Consider setting up a completely new bank account just for the PPP funds.
- Gather receipts and invoices for other qualifying expenses such as your rent, mortgage interest and utilities.
The more documentation you can provide, the better your chances will be at getting your PPP loan completely forgiven.
Consulting with your on-staff or contract accountant before you apply for a PPP loan is the best idea, as it can help you get everything in order to give you the best chance to receive a loan, and then have the proceeds forgiven. If you don’t have an accountant, now is a great time to consult with one to see how they can help in other areas of your business, too.