Mary Owens: PPP loans and new opportunities for employers
The rules and opportunities for applying for PPP loans when they first were granted were confusing and not well communicated. Many who could have applied did not simply because they did not understand the process well enough and did not believe the effects of COVID would last as long as they have to date. If you are one of those employers, don’t distress, there is now a new pool of funds set aside for those who did not previously receive a PPP cash infusion. Lawmakers set aside another $35 billion.
To qualify for the new second draw of PPP funds, you must meet the following qualifications:
• You must have 300 or fewer employees;
• Your business must have incurred a 25% or greater loss in revenue during at least one quarter in 2020;
• And if you did receive PPP funds in the past, you must have already used it or are planning to use it soon.
If your business did not operate for all of 2019, alternate qualification tests are available. For example, you started your business in the fall of 2019. You may use the fourth quarter of 2019 to compare to the first, second or third quarters of 2020.
An example of the 25% revenue is as follows:
• David has gross revenues of $500,000 in the fourth quarter in 2019.
• David’s gross revenue for the fourth quarter of 2020 was only $325,000.
• David passes the 25% revenue reduction test. He may apply for the second round of PPP funds as long as he satisfies the rest of the qualifications test.
How large of a loan can you qualify for?
The rules of the second draw PPP loan amounts follow similar rules that were in place for the first draw, with modifications as follows:
• The loans are capped at $2 million or less;
• If you are a restaurant or hotel owner (which means you have a North American Industry Classification Code of 72), calculate your average monthly payroll for either 2019 or the trailing twelve months and multiply that number by 3.5 to find your qualifying loan amount;
• If you are not a restaurant or hotel owner, calculate your average monthly payroll for either 2019 or the trailing twelve months and multiply that number by 2.5 to find your qualifying loan amount.
You are allowed use your 2019 payroll amounts or the past 12-month payroll. However, some lenders will want you to use 2019 because your payroll numbers are easy to verify and it reduces the lender’s continuing loan administration burden. Lenders are overwhelmed with the new regulatory burdens placed upon them to monitor these loans. Keep good records of your payroll. Without proper documentation the approval process is delayed or even denied.
What are the qualifying expenditures allowed under the program?
• These rules give you some flexibility with the intent of assisting you in qualifying for complete loan forgiveness.
• During a period of your choosing, beginning with the eight week period from the origination date of the loan, and ending 24 weeks from the origination date, you MUST spend 60% or more of the monies for defined and/or deemed employee payroll to achieve the first step in 100% forgiveness.
• In addition to payroll, other expenses also qualify:
• Operations expenditures
• Property damage
• Interest on mortgage indebtedness related to the business
• Supplies for the necessary operation of the business
• Worker protection materials
If you do not spend at least 60% or more of the loan on payroll, your loan forgiveness is limited as follows:
Loan amount was $250,000, which requires at least $150,000 (60%) to be spent on qualifying payroll. The borrower only spent $125,000. The loan forgiveness will be reduced by the expenditures on payroll. ($125,000 divided by .60) equals $75,000. The amount of qualifying loan forgiveness will be reduced by $75,000, changing the potentially forgivable amount from $250,000 to $175,000 ($250,000-$75,000).
The PPP loan monies are tax-free, and the expenses paid with PPP loan funds that are forgiven are still tax deductible. These tax issues were not clear at first, but recent legislation and IRS rulings clarified this additional tax benefit.
Please contact your tax professionals to assist applying these rules to your business. But do not delay in applying; once the $35 billion has been consumed in loans, the program ends.
Mary Owens, Founder, Owens Estate & Wealth Strategies Group, Financial Advisor, RJFS, 426 Sutton Way, Suite 110, Grass Valley, CA 95945, 530-272-7500. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services.
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