How to get a Paycheck Protection Program loan, document your expenses, and apply for loan forgiveness.

18 minute read

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Hello everyone. And thanks for joining me. I’m Laura Adams, your host and personal finance author, speaker, and consumer advocate. Who’s been producing the money girl podcast since 2008. Like you, I have been following the protests that are happening all over the world.

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There’s no denying that our financial lives are all very, very different, but they have one thing in common. We all want financial security that unites us and the fundamental principles for creating financial security are the same. No matter the challenges you may have faced in the past or the hardships you’re going through right now, my personal mission and the purpose of this podcast is to give you knowledge, resources, and motivation to manage your money the best way possible and create a richer life.

And when I say you, that means everyone, no matter the color of your skin, your gender identity, your education level, your age, religion, your politics. There’s so much that can divide us. But my job is to make this show a place where everyone feels included and welcome all that to say, I appreciate you being here and we’re going to kick off today’s show with a recent question I received from Alex F who says, hello, Laura, I love your podcast tips and many helpful episodes. Over the years, I would love to learn more about documenting my payroll for the paycheck protection program. Thank you, Alex. I appreciate your kind words and sending in the question. I’m glad to know that you’re a long time podcast listener, and also that you were able to take advantage of the PPP or the paycheck protection program that economic stimulus was created for small businesses.

And the best part about a PPP loan is that you can have some or all of it forgiven. In other words, if you follow some rules, you can turn a PPP loan into a grant that is free money. It does not have to be repaid. So this podcast is going to explain how to get a PPP loan, eight things to know about getting that money forgiven. So you don’t have to repay it tips for documenting your expenses and how to apply for loan forgiveness. The bottom line is that keeping as much of your PPP funds as possible saves money, and it keeps your business operating despite the Coronavirus challenges. So let’s talk about what is this program that I’m talking about? You’ve probably heard a lot about PPP. It’s part of the $2 trillion cares act. It began in early April, 2020 to provide financial relief to small businesses hurt by the pandemic, participating lenders coordinate with the small business administration or SBA to offer these forgivable loans to business owners who want to continue paying their employees.

And that includes themselves during the COVID-19 crisis. The first round of PPP stimulus paid out $349 billion, and it paid that out in less than two weeks. So then at the end of April, Congress approved another round, they approved 310 billion for the program. Now there are still funds in this program to date, as I’m recording this show, there are still funds there and you can apply for them through the end of June. So if you’re somebody who has any self-employment income that has been hurt, has been reduced due to the Coronavirus, you can apply through June 30th, 2018.

So how do you get this loan?

Well, as I mentioned, these funds are generally available for small businesses, and that means you’ve got to have fewer than 500 employees. And it includes those who are self employed with no employees, any that experience of financial hardship due to COVID. You can be a sole proprietor. You can work for yourself part time or full time. And I will say that there are businesses in specific industries like food, service, hotels, and bars that will qualify for this, even if they have more than 500 employees. So it just really depends on the industry that you’re in eligible. Self-employed individuals and businesses must have been in operation by February 15, 2020. So if you started a business after February 15 of this year, you’re not going to be eligible, but if you were open at all, if you started, let’s say at the beginning of the year on January 1st, or you started anytime in 2019 or before you’re eligible other determine eligibility, but these are the primary requirements.

So you apply for PPP through existing SBA lenders, or institutions that enroll in this program and get approved by the SBA to participate in the program. So you can go to sba.gov to learn more. There are just a ton of banks, credit unions, and online lenders that are participating. And as I mentioned, still have money to lend. You don’t have to put up any collateral. You don’t have to make any personal guarantees. You don’t even have to pay any, any fees to qualify for a PPP loan. It’s probably one of the easiest loans that you’re ever going to get. And if you have a business bank account, what I would recommend is that you check to see if that institution with that bank is funding the PPP. But if not, don’t worry because there are plenty of institutions to work with. You can’t take more than one PPP loan, but you can apply with multiple lenders.

So that’s what I would recommend. If you’ve, let’s say you’ve applied, but you got turned down or you just haven’t heard back yet. They’re being very slow to respond. Keep applying apply to different lenders because they’re all going to be a little different and how quickly they process your application. And they’re all going to be a little different in how they evaluate you. Some will be more lenient and require less paperwork than others. In general, I recommend working with tech savvy online lenders because they’re mobile friendly and they have streamlined applications that are really easy to complete. So a couple that you might want to check out are cabbage and fund Dera. These are small business lenders that are offering P loans. So what can you get from a PPB loan? They can equal two points, five times, your average, monthly payroll from 2019 up to a cap of $10 million, but payroll costs per employee.

And that includes yourself are capped out at a hundred thousand dollars on an annualized basis. So if you’re self employed and you have no employees, or maybe you’re in a partnership, you or your share of the net business profit for 2019 is used as your payroll. So if your business net earnings exceed a hundred thousand dollars, that a hundred thousand dollar is going to be the cap for an annualized equivalent salary. And that net profit can be for 2019, or even for just the beginning of 2020, if you started your business at the beginning of the year. And since income taxes for 2019 are not due until July 15, 20, 20 many entrepreneurs have not completed their taxes for last year. Yet, nonetheless, as part of the application, you must submit form 10 40, schedule C with a PPP application, even if it’s just your best estimate on your business, profit or loss for last year.

So let’s say your, a solo preneur who offers graphic design and web services. If your business is net profit last year was 120,000, then your PPP loan would be based on a hundred thousand dollars. That’s the threshold. You divide that amount by 12 for a monthly payroll of $8,333, and then multiply by 2.5, which would allow you to receive a maximum PPP loan of $20,833. Now I know that may seem a little bit complicated and any application that you complete is going to totally walk you through this. So, you know, don’t be afraid that you’ve got to come up with this calculation on your own. It’ll be pretty obvious before I go on. I want to tell you about today’s sponsor indeed for any business. The next step you make is the most important one, like hiring someone who can make a real impact. Indeed helps you find high impact hires faster without any longterm contracts and you pay only for what you need thanks to their super flexible payment options.

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They also offer ups services with discounts up to 62% and no residential surcharge right now listeners get a special offer that includes a four week trial plus free postage and a digital scale without any longterm commitment, just go to stamps.com, click on the microphone at the top of the homepage and type in money. Girl, all one word that’s stamps.com and enter money. Girl, if you’re considering applying for a PPP loan, or let’s say you already received one, it’s really critical to make sure that you qualify for as much forgiveness as possible, just because you got approved for the program, doesn’t mean you automatically get to keep all the funds. At the beginning of June, the paycheck protection program, flexibility act of 2020 was passed. So yet another regulation and it’s expected to be signed by the president. And I think as of this recording, he just signed it.

So it is like officially law as of like yesterday or today. And it modifies the previous rules for PPP forgiveness, making them more favorable for small businesses. I’m going to cover what you need to know about the new legislation and eight key points related to PPP forgiveness. All right, so here we go. We’re going to go through eight key points she needed to know to get that PPP loan forgiven, turn it from a loan into a grant. Number one you’re forgiven amount depends on your payroll. Payments. Businesses have 24 weeks to spend PPP funds on qualified expenses, such as payroll. Now this was increased from eight weeks and it’s going to give companies more time to reopen and rehire staff. And also the new rule says, you have to use at least 60% of a loan on your payroll costs. That’s down from 75% previously, you got to use 60% of it on payroll.

And that does not include any payments that you might make to independent contractors. This is simply payroll either to w two employees on your staff or to compensation. You pay yourself as a business owner. You can include salaries, commissions, and benefits for your employees, such as insurance, sick leave and retirement matching again, up to a hundred thousand dollars per employee on an annualized basis. But if you are self employed with no employees, you cannot include any benefit costs in your own payroll. When it comes to PPP forgiveness, you can only include wages or net earnings from your business. And your forgiveness was limited to eight weeks of pay up to 15,385 bucks per individual. So again, even if you earn more than a hundred thousand dollars, the forgiveness calculation basically just takes 100,000 divided by 52 weeks in a year and multiplies by eight weeks of compensation.

So again, 15,385 is the maximum payroll that you can have forgiven, uh, as a self employed person with no employees. Now it’s not clear if that amount has changed due to the PPP flexibility act. If the self employed people also get 24 weeks of payroll, the calculation means that it would be a much higher amount, which is more than double the allowable loan for the self employed individuals. So I’m going to guess that the eight week cap will not be lifted, but I’ll keep you posted if that changes. All right. So that’s the first thing that your payroll amount determines how much can be forgiven. Number two you’re forgiven amount depends on your non-payroll expenses. Some non-payroll expenses also qualify for forgiveness and these include business rent utilities and interest on debts that you pay after getting the loan. But these expenses must have been an obligation of yours before February 15, 2020.

So if you just got a brand new business debt in March or April, that’s, that interest is not going to qualify. These non-payroll expenses can not exceed 40%. And that’s up from 25% previously of your PPP forgiveness amount. All right, number three, your payroll costs cannot decrease significantly. So to qualify for PPP loan forgiveness, you’ve got to maintain reasonable salaries and wages for your employees. That’s the whole point of the program. If you decrease them by more than 25% for any employee, and that includes yourself who made less than a hundred thousand dollars in 2019, your forgiveness amount will be reduced. However, you can increase salaries or pay bonuses. If you like, just remember that the total compensation can’t exceed a hundred thousand dollars on an annualized basis per employee, right? Number four, you must make a good faith effort to keep employees PPP loan forgiveness also depends on keeping your full time folks.

Again, this is the purpose of the program to keep people employed, to keep them paid, including yourself. But if you had employees who left your company voluntarily, or who requested a cut in hours, or maybe they were fired for, cause during the pandemic, your loan forgiveness will not be reduced for those situations. And another change is that now you have until December 31st, 2020 to rehire or to restore your staff for any employment changes that occurred between February 15 and April 26, 2020. All right, number five, you don’t owe taxes on forgiven amounts. Any amount of your PPP loan that is forgiven will not qualify as federal taxable income. Some States that charge income tax have indicated that they will not tax forgiven amounts either. However, not all States have issued their rules on this. So be sure to get guidance. If you live in a state with income tax, number six, you can’t claim forgiven expenses as a tax deduction.

So if you do qualify for PPP forgiveness on payroll or non payroll expenses, you can’t also claim them as deductions on your taxes. That would be double-dipping. Even if those expenses would ordinarily be tax deductible, getting them forgiven as a result of the PPP loan becomes your deduction. That is your tax benefit. Again, the IRS is not going to let you double dip a tax benefit. So don’t try to also claim them on your taxes for 2020, number seven, you must formally request loan forgiveness. So you have to complete a PPP loan forgiveness application. I’ll have a link to that application in the notes for the show that’s in the money girl section@quickanddirtytips.com. You have to fill that out and get approved by your lender to qualify for either partial or full forgiveness. The paperwork should come from your lender, or you can download it from the SBA website as well.

The forgiveness application explains what documents you’ve got to include, and they vary depending on whether you have employees or not. You also have to verify the number of full time employees and their pay rates. You have to verify your eligible non-payroll business expenses, such as lease and utility payments that I mentioned. Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan, if any amount can be forgiven and number eight, you must repay unforgiven amounts. If some or all of your loan is not forgiven, it must be repaid within five years. Now that’s up from two years previously, gotta repay it within five years at a 1% fixed interest rate. That’s incredibly low. Obviously you don’t have to start making payments for 10 months after loan disbursement. And that’s up from six months previously. So you’ve got 10 months, but interest will accrue during this deferral period.

Alright, I know that’s a lot to absorb and maybe you’ll want to go back and listen to this podcast again, or read the post over in the money girl section@quickanddirtytips.com just to absorb everything. But now that you understand the main requirements and the limitations for getting a PPP loan forgiven, I want to go back to Alex’s question about properly documenting payroll. Some lenders have requested that PPP loans get deposited into a separate business bank account, but that’s not required. If you have employees, you need document it’s that verify the number of employees, their salaries, their wages, and you can generate a payroll report from your bookkeeping program and you can provide IRS form nine 41. That’s the employer’s quarterly federal tax that employers are used to submitting. And also any state tax reporting forms to prove what you paid your bank account statements will also show cash compensation paid to your employees are paid to yourself over the qualifying period.

And if you are self employed with no employees, you simply need to document compensation paid to yourself over the qualifying period. You might generate a report or provide your bank account statements for verification. Likewise, you should maintain documentation for any non-payroll qualifying business expenses that you established before February 15, 20, 20. As I mentioned, these might include rent and utilities like power, water, gas, transportation, phone, and internet use for your business. If you use a bookkeeping program, simply create a new category for eligible expenses so that you can run a report on the total amount of those expenses that qualify you for the PPP forgiveness. There are not any official rules about keeping records for forgiveness, but I will say the more detail you have the better Alex. Thanks again for the question. If you have a money question or an idea for a future show topic, I would love to hear it.

And you can also call in your question or comment. We’ve got a voicemail line that you can call 24 seven it’s (302) 364-0308. Or you can always email me by visiting my contactPage@lauradadams.com. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is produced by the audio wizard, Steve rookie Berg with editorial support from Karen Hertzberg. If you’ve been enjoying the podcast, take a second to rate and review it. Your ratings and reviews mean so much to us. We read all of them. You might also like the backlist episodes and show notes that are always available@quickanddirtytips.com

 

Alex F. says:

Hello, Laura! I love your podcast, tips, and many helpful episodes over the years. I would love to learn more about documenting my payroll for the Paycheck Protection Program.

Thanks for your kind words and question, Alex. I’m glad to know that you’re a long-time listener and that you were able to take advantage of the Paycheck Protection Program (PPP) economic stimulus that the US government created for small businesses.

The best part about getting a PPP loan is that you can have some or all of it forgiven. In other words, if you follow some rules, you can turn a PPP loan into a grant that doesn’t have to be repaid.

Today, I’ll explain how to get a PPP loan, what’s required for forgiveness, tips for documenting your expenses, and how to apply for loan forgiveness. Keeping as much of your PPP funds as possible saves money and keeps your business operating despite the coronavirus challenges.

Here’s what small business owners need to know about getting a PPP loan and qualifying for forgiveness.

What is the Paycheck Protection Program?

The PPP is part of the $2 trillion CARES Act. It began in early April 2020 to provide financial relief to small businesses hurt by the pandemic. Participating lenders coordinate with the Small Business Administration (SBA) to offer forgivable loans to business owners who want to continue paying their employees (including themselves) during the COVID-19 crisis.

The first round of PPP stimulus paid out $349 billion in less than two weeks. At the end of April, Congress approved an additional $310 billion for the program. There are still funds in the program to date, and you can apply through June 30, 2020.

How to get a PPP loan

PPP funds are generally available for small businesses with 500 or fewer employees (including those who are self-employed with no employees) that experience financial hardship due to the COVID-19 crisis. You can be a sole proprietor and work for yourself part- or full-time. Businesses in specific industries (such as food service and hotels) with more than 500 employees, may also qualify.

Eligible self-employed individuals and businesses must have been in operation on February 15, 2020. Other factors determine eligibility, but these are the primary requirements.

You apply for PPP through existing SBA lenders or institutions that enroll and are approved by the SBA to participate in the program. They include banks, credit unions, and online lenders. You don’t have to put up any collateral, make personal guarantees, or pay any lending fees to qualify for a PPP loan.

If you have a business bank account, check to see if your institution is funding the PPP. But if not, don’t worry because there are plenty of institutions to work with. You can’t take more than one PPP loan, but you can apply with multiple lenders. That may increase your chance of getting approved because each one may evaluate you a little differently.

In general, I recommend working with tech-savvy online lenders with mobile-friendly, streamlined applications that are easy to complete. Check out Kabbage and Fundera, which are small business lenders offering PPP loans.

How much can you get from a PPP loan?

PPP loans can equal 2.5 times your average monthly payroll from 2019 to a $10 million cap. But payroll costs per employee, including yourself, are capped at $100,000 on an annualized basis. If you’re self-employed with no employees, or you’re in a partnership, your (or your share of) net business profit for 2019 or the beginning of 2020 can be used as your annual payroll.

Since income taxes for 2019 aren’t due until July 15, 2020, many people haven’t completed their taxes. Nonetheless, you must submit Form 1040 Schedule C with a PPP application, even if it’s your best estimate on your business profit or loss for last year.

Let’s say you’re a solopreneur who offers graphic design and website services. If your business’s net profit last year was $120,000, then your PPP loan would be based on $100,000. You divide it by 12 for a monthly payroll of $8,333 and then multiply by 2.5, which would allow you to receive a maximum PPP loan of $20,833.

8 things to know about PPP loan forgiveness

If you’re considering applying for a PPP loan, or you’ve received one, it’s critical to make sure you qualify for as much forgiveness as possible. Just because you got approved for the program doesn’t mean you automatically get to keep all the funds.

At the beginning of June, the Paycheck Protection Program Flexibility Act of 2020 was passed, and it’s expected to be signed by the President. It modifies previous rules for PPP forgiveness making them more favorable for small businesses.

I’ll cover what you need to know about the pending legislation and eight key points related to PPP forgiveness.

1. Your forgiven amount depends on your payroll payments

Businesses have 24 weeks to spend PPP funds on qualified expenses, such as payroll. This was increased from 8 weeks to give companies more time to reopen and rehire staff.

You must use at least 60% (decreased from 75% previously) of a PPP loan on payroll costs, which do not include payments to independent contractors. You can include salaries, commissions, and benefits for your employees, such as insurance, sick leave, and retirement matching, up to $100,000 per employee annualized.

If you’re self-employed with no employees, you can’t include benefit costs in your payroll for PPP forgiveness, just wages or net earnings from your business. Your forgiveness was limited to eight weeks of pay up, to $15,385 per individual. If you earn more than $100,000, the calculation is $100,000 divided by 52 weeks in a year, multiplied by eight weeks of compensation.

But it’s not clear if this has changed due to the PPP Flexibility Act. If the self-employed also get 24 weeks of payroll the calculation is $100,000 divided by 52, multiplied by 24, which is $46,154. That’s more than double the allowable loan for a self-employed individual. So, I’m guessing that the eight-week cap won’t be lifted, but I’ll keep you posted.

2. Your forgiven amount depends on your non-payroll expenses

Some non-payroll expenses also qualify for PPP loan forgiveness. These include business rent, utilities, and interest on debts you pay over eight weeks after getting the loan. But they must have been your obligation before February 15, 2020.

These non-payroll expenses can’t exceed 40% (up from 25%) of your PPP forgiveness amount.

3. Your payroll costs can’t decrease significantly

To qualify for PPP loan forgiveness, you must maintain reasonable salaries and wages for your employees. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced. 

However, you can increase salaries or pay bonuses if you like. Just remember than the total compensation can’t exceed $100,000 on an annualized basis, which is $15,385 for the eight weeks following your PPP funding.

4. You must make a good-faith effort to keep employees

PPP loan forgiveness also depends on keeping your full-time employees. But if you had employees who left your company voluntarily, requested a cut in hours, or were fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.

Another change is that you now have until December 31, 2020, to rehire or restore your staff for any employment changes that occurred between February 15 and April 26, 2020.

5. You don’t owe taxes on forgiven amounts

Any amount of your PPP loan that’s forgiven will not qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.

6. You can’t claim forgiven expenses as a tax deduction

If you do qualify for PPP forgiveness on payroll or non-payroll expenses, you can’t also claim them as deductions on your taxes. Even if they would ordinarily be tax-deductible, getting them forgiven as the result of a PPP loan becomes your deduction. The IRS doesn’t let you double-dip a tax benefit.

7. You must formally request loan forgiveness

You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website.

The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. You must verify the number of full-time employees and their pay rates. You also must verify your eligible non-payroll business expenses, such as lease and utility payments.

Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.

8. You must repay unforgiven amounts

If some or all of your PPP loan is not forgiven, it must be repaid within five (up from two) years at a 1% fixed interest rate. You don’t have to start making payments for 10 (up from six) months after loan disbursement, but interest will accrue during this deferral period.

How to document payroll for PPP loan forgiveness

Now that you understand the main requirements and limitations for getting a PPP loan forgiven, let’s go back to Alex’s question about properly documenting his payroll. Some lenders have requested that PPP loans get deposited into a separate business bank account, but that’s not required.

If you have employees, you need documents that verify the number of employees, their salaries, and wages. You can generate a payroll report from your bookkeeping program and provide IRS Form 941, Employer’s Quarterly Federal Tax Return, and any state tax reporting forms to prove what you paid. Your bank account statements will also show cash compensation paid to your employees over the qualifying 24-week period.

If you’re self-employed with no employees, you simply need to document compensation paid to yourself over the qualifying eight-week period. You might generate a report or provide your bank account statements for verification.

Likewise, you should maintain documentation for any non-payroll qualifying business expenses you established before February 15, 2020. As I mentioned, these might include rent and utilities – such as power, water, gas, transportation, phone, and the internet – used for your business. If you use a bookkeeping program, create a new category for eligible expenses, so it’s easy to run a report on the total amount.

There aren’t any official rules about keeping records for PPP forgiveness, but the more detail you have, the better.

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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