How to get your PPP loan forgiven and apply for a second one

PPP loans can be the life raft your business needs. Find out how to cancel your first loan so you can work on getting the next one.

No doubt, 2020 has been hell for small businesses. Retail businesses in many areas could not stay open. Employees could not work if they had COVID-19 or were at increased risk of contracting the virus. The banks were as scared as everyone else, and finding a small business loan became impossible.

Midway through the year, the Paycheck Protection Program (PPP) was introduced to provide relief to small businesses through SBA small business loans. My company took advantage of the program and kept high-risk employees on the payroll and maintained their insurance, even when they couldn’t come to work.

We applied for and received loan forgiveness on the loan as soon as we could, and this week we received an email from our banker offering us the opportunity to participate in the second round of PPP loans which is currently taking place.

Let’s see how you can get your PPP loan forgiven and if you will qualify for the second round.

Overview: what is a PPP loan?

PPP loans are intended to help small businesses maintain payrolls even at the worst of the pandemic. You must use 60% or more of the loan funds on payroll, and the rest must be used for crucial expenses such as rent and utilities.

The program goes through the existing Small Business Administration (SBA) loan origination process where private banks issue the loans, which are then guaranteed by the government.

Loans are available to small businesses and independent contractors.

How PPP Loan Forgiveness Works

If you took out a first PPP loan last year and haven’t yet, now is the time to apply for a PPP discount. The longer you wait, the more likely you are to owe interest or not be repaid on your loan. Here are the PPP forgiveness requirements.

1. Collect information from your accounting software

The SBA requires you to submit specific information for the loan to be fully forgiven. At least 60% of the loan funds must be used on payroll, and the rest can only be used on mortgage interest, rent, utilities, or uninsured damage caused by civil unrest.

Most accounting software has added special reports that you can run to get all the information you need. Look for PPP reports. If you cannot find one, gather the following information for the 24 weeks after receiving the loan funds:

  • Total labor and load costs (gather all IRS 941 forms for proof)
  • Number of employees at origin of loan and after 24 weeks
  • Total mortgage interest, rent and utility expenses for the 24 week period

2. Complete the Loan Forgiveness Application

Your bank should be able to help you with the loan cancellation process. Mine had software built into the banking server where I could enter the necessary information. If your bank does not help you, check the SBA loan forgiveness website and use the latest app.

It shouldn’t take long for the application to complete, and if you follow the PPP loan cancellation rules, the full amount will be forfeited. It took me 17 minutes to complete the application and my bank submitted it to SBA the same day.

3. Do not pay taxes on the amount given

The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (say three times faster), which launched the second round of PPP loans, also changed the rules around the taxation of PPP loan forgiveness.

Traditionally, any canceled loan must be reported as income on your company’s balance sheet. When the CARES Act was passed last year to start the PPP, the law required that all expenses paid for by the loan be excluded from the income statement or that the loan forgiveness be reported as income.

The new law allows businesses to report expenses and reduce taxable income, but excludes businesses from having to report loan forgiveness as income.

I once had a PPP headache when renewing a line of credit that my company has. I removed the PPP loan from the balance sheet on the interim statement when it was canceled, but initially made the journal entry to debit the loan and credit other income.

Now that we know that the loan forgiveness will not be treated as other income, the balance sheet does not balance. This makes the bank nervous. We don’t know exactly how to account for loan forgiveness yet, and you’ll need to rely heavily on your CPA at tax time to make sure you’re doing everything right.

Note: If you’re paying interest on funds from a PPP loan because you don’t have enough payroll to use it, you can charge interest as you would for a normal loan.

3 PPP Second Draw Loan Requirements

Here are the requirements for getting a PPP Second Draw Loan.

1. Received a First Draw Loan

If you haven’t gotten a First Draw loan, now is the time. The process is the same as for Second Draw loans with fewer requirements (you don’t need to prove sales decline). The sooner you receive a first-draw loan, the sooner you can forgive it and try to enter the second-draw round.

2. Have no more than 300 employees

The SBA has a convoluted industry-specific way of judging whether businesses are small for its normal loans, but it simplified that by limiting loans to businesses with fewer than 300 employees for the PPP.

3. Had a 25% reduction in sales

Congress wants to make sure that if you participated in the first round, you only participate in the second if you really need to. You can only qualify for the loan if one of your 2020 quarters had total sales 25% lower than the same quarter in 2019.

So if you had $450,000 in sales in Q2 2020 and $600,000 in Q2 2019, you would qualify. Here’s the math: (($600,000 – $450,000)/$600,000 = 25%).

If you haven’t already, follow the news and bookmark this article to reread it every month or so. I have a feeling that the 25% amount will go down at some point. One of my banking contacts told me this week that the majority of his clients had a maximum drop in sales between 17% and 22%. If the same is true nationwide, Congress will eventually open the program to more companies.

This requirement is the same if you work for yourself as an independent contractor. Many independent contractors do minimal bookkeeping during the year (just enough to pay estimated taxes) and rely on a CPA or accountant to figure it all out at the end of the year. It’s probably worth figuring out exactly how much you’ve made in each of the last eight quarters to qualify if you can.

How to apply for a PPP (Paycheck Protection Program) loan

Getting a PPP loan is easier than a normal loan. Here’s what you should do.

1. Visit your usual banker

If your bank gives SBA loans, they can probably help you with a PPP loan. If they can’t, consider switching banks. Your banker, or your bank’s SBA department, should be an expert on the program and able to walk you through the process painlessly.

2. Gather the documents

the Amount of the loan is based on the gross salaries you paid to employees in 2019 minus any salary paid to individual employees over $100,000. This is another place where good accounting software will save you a lot of time. If your software has DPI reports, you can simply print them. Otherwise, you will need to report salaries and expenses for all your employees from 2019 to use on the app.

3. Use proceeds on the right expenses

Follow PPP loan forgiveness guidelines as much as possible. If you do, the PPP loan is effectively free money for your business with no tax liability.

Don’t delay, apply today

Most business owners dread interacting with the government. You have to declare endless items and pay taxes for just about everything. The Paycheck Protection Program is a way to take advantage of a government program designed to keep your business afloat during volatile times.

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