Are you interested in learning more about the Payroll Protection Program (PPP) loans and the Coronavirus Aid, Relief, and Economic Security Act (CARES)? Here at Gusto, we’ve got you covered — with some help from our friends at CPA Academy.
CPA Academy is a phenomenal resource where you can attend free live webinars and take self-education courses while earning CPE credits along the way. We’re proud to partner with them and support their mission of making CPA education available to everyone!
On April 16, 2020, Jason Freeman hosted a live webinar on CPA Academy to discuss the CARES Act, with a particular focus on the Payroll Protection Program — an SBA-funded loan originating from the CARES Act. During these unprecedented times of COVID-19 and economic unrest, there are sure to be many pressing questions surrounding these loans, such as:
- Who is eligible for a PPP loan?
- When will I receive my PPP loan?
- What is the maximum amount for the PPP loan?
As accountants for small businesses, these are all questions that we need answers to — which is why CPA Academy offered a free webinar giving a comprehensive overview of PPP and the CARES Act. In this article, we’ll focus on some frequently asked questions about the PPP loan that our CPA Academy partners were gracious enough to answer.
“When will I receive my PPP loan?”
Perhaps one of the most pressing questions about the PPP process is when borrowers will receive their loans. Unfortunately, there is no clear-cut answer. There are a number of factors that influence the time frame of receiving your PPP loan, one of which is the bank you use:
My anecdotal experience on that has been [that] the smaller banks have tended to process this a little more quickly. I’ve seen some that were funded within about 24 hours, and I’ve seen some who are kind of waiting in a black hole … for more than a week. So it’s really varied. … These [loans] are administered and handled through each individual bank, and so you just see a great deal of variance in the way that that process is working out.– Jason Freeman
Also, keep in mind that the Payroll Protection Program is a first-come, first-served program. Funds will eventually run out, so make sure to submit your PPP application as soon as possible to receive a loan.
“Who is eligible for a PPP loan?”
In order to receive a PPP Loan, borrowers will need to meet certain qualifications. Here is who is eligible for a PPP Loan:
- They are businesses that have been in operation since before February 15, 2020 and have 500 or fewer employees.
- They are non-profit organizations that have 500 or fewer employees.
- They are Schedule C Filers (sole proprietors, independent contractors, and self-employed individuals).
As with most rules, there are some expectations:
There are some exceptions to that 500-or-fewer-employee rule, depending on the particular industry and the SBA’s guidance for that industry. … Also, it applies or extends to sole proprietors, independent contractors, and eligible self-employed individuals. As I mentioned, the SBA just recently came out with guidance.– Jason Freeman
If you’re unsure whether or not your business qualifies for a PPP loan or if you may be eligible for exceptions, the best practice is to apply for the loan and wait for your results.
Lastly, under penalty of perjury, PPP applicants must certify that their business has need of financial aid due to the current economic conditions to keep their business fully operational.
Many borrowers … meet this [credential] no problem. But you do have some borrowers who are not going to be able to make this certification in good faith. … You [accountants] need to be there as the voice of reason for some of these … borrowers who may be unable to actually make these certifications — because as history as shown repeatedly, in the aftermath of these crises, government agencies and prosecutors will tend to look back with a much finer-tooth[ed] comb at these sorts of issues once the dust has all settled.– Jason Freeman
Whether you’re applying for a PPP loan yourself or you’re an accountant, ensure that your business fits the above qualifications and has a true need of financial aid.
“What about Schedule C borrowers and PPP loan eligibility?”
As mentioned above, Schedule C Borrowers are eligible for PPP loans, but they have to meet certain criteria in order to qualify:
- They were in operation before February 15, 2020.
- They had a principal place of residence in the United States.
- They filed or will file an IRS Form 1040 Schedule C for 2019.
If a Schedule C Filer meets these requirements, they are eligible for a PPP loan, and the number of employees that they have determines the amount of the loan. Here’s how Jason Freeman summed it up:
[The amount is] different depending on whether the self-employed individual has employees or does not. So if they do not, the starting point here will be the amount listed on Line 31 — that’s net profit or loss of the 2019 Schedule C. If the amount exceeds $100,000, it has to be reduced to $100,000. If that amount is zero or negative, they will not, under the SBA’s guidance, … be eligible for a PPP loan. This amount has to be divided by 12. That gives the average monthly net amount. That amount will be multiplied by 2.5, … and then if the taxpayer or borrower received an Economic Injury Disaster Loan prior to April 3rd, 2020, that’ll be refinanced as part of the PPP loan. They’ll also need to add that amount into step three. So that is your basic set of steps for PPP applicants who are Schedule C sole proprietors.– Jason Freeman
If you’re a Schedule C sole proprietor, follow the steps that Jason laid out, and you’ll be on your way to receiving a PPP loan for your self-owned business. You can also check out this Forbes article, written by Jason Freeman, that gives a detailed overview of all this information, along with some additional expectations and regulations.
“Who is ineligible for a PPP loan?”
In addition to sharing the requirements for PPP eligibility, CPA Academy also detailed the specific conditions that will deem a borrower ineligible for PPP loans. Here’s who is not eligible for PPP:
[This] includes taxpayers who engage in activity that’s illegal under federal, state, or local law. It also includes … where an owner of 20% or more of the equity of the applicant is incarcerated, on probation, on parole, or subject to an indictment, criminal information, arraignment, or similar circumstance. So know that these are out there and these need to be addressed for some borrowers.– Jason Freeman
If your business does not receive a PPP loan, keep in mind that it may be due to a criminal record. If you applied for a PPP loan and didn’t receive it, read this article for more information on next steps to receive SBA funding.
“What is the maximum amount of my PPP loan?”
Wondering how much money you’ll receive from your PPP loan? CPA Academy had answers.
The maximum amount of the loan is limited to the lesser of … two amounts — the average total monthly payments by the applicant for payroll costs incurred during a one-year period prior to the date of the loan, multiplied by 2.5, or an overall cap of $10 million. … The SBA came out with guidance fairly recently that took a more borrower-friendly position on this first prong and basically sa[id] that borrowers can either use the one-year period prior to the date of the loan or 2019. So it gives a little bit of flexibility there.– Jason Freeman
To calculate the maximum amount for your PPP loan, use this form provided by SBA — it will walk you through the process on how to calculate first draw PPP loans by your business type.
“How can I use my PPP loan?”
When you receive your PPP Loan, keep in mind that there are certain categories of allowable uses. Here are some allowable costs that you can fund via your PPP loan:
- Payroll costs
- Costs relating to the continuation of group healthcare benefits
- Employee salaries
- Employee commissions (or similar compensation)
- Interest on mortgage obligations, rent, utilities, and debt obligations (that began before February 15, 2020)
“What is PPP loan forgiveness?”
What if you can’t pay back some of your PPP loan? You’ve used the money wisely and within the SBA regulations; however, due to the economic climate, you’re not able to pay off the entire loan. Thankfully, the SBA has instituted “PPP loan forgiveness” in circumstances such as these:
A loan can be forgiven in an amount equal to the costs paid and incurred during what’s known as the covered period, and that is an eight-week period that begins on the date of the initial loan disbursement. So from that, during that eight-week period, the amount of the proceeds that are expended on payroll costs, payment of interest on the covered mortgage obligation, payment on a covered rent obligation, and any covered utility payment, as a general rule, these categories are allowed for forgiveness.– Jason Freeman
That’s great news! The amount spent on costs within regulations is forgiven during the initial eight-week period. However, there are a couple of caveats to this rule that you should be aware of:
- No more than 25% of the amount forgiven can fall into a non-payroll cost category.
- You must maintain documentation of how the PPP funds were used.
Keep in mind that if the business did not use the PPP loan to pay approved costs, then they are not eligible for loan forgiveness.
“What are the PPP loan forgiveness limitations?”
In addition to the caveats above, there are some additional limitations that restrict the amount of loan forgiveness to a PPP borrower.
The first one comes into play where there is a reduction in the number of employees, and specifically, where there’s a reduction of the number of employees during that eight-week period following the initial disbursement of loan proceeds. … There [are] two choices here. … One is to compare that against the average number of full-time employees during a period in 2019, and that’s February 15th, 2019 through June 30th, 2019, a period that was designed to roughly approximate the period in 2020 at issue, or the borrower may use the average number of full-time employees from January 1 of this year through the end of February as a baseline to calculate whether there’s been a reduction in the number of employees.– Jason Freeman
If there has been a reduction in the number of employees during that period, then the amount of loan forgiveness is reduced. Another loan forgiveness limitation is due to reduced salaries and wages:
This comes into play where there’s a reduction in the salary or wages of an employee by more than 25%. This only applies to employees who make less than $100,000. But where there’s an employee who makes less than $100,000, and their salary is reduced by more than 25%, the borrower will have limitations to that extent on the forgiveness of the PPP loan.– Jason Freeman
As a people-centered accountant, it’s your job to help your clients navigate through these complex issues so that they can maximize the benefit of loan forgiveness.
“Can accountants who are assisting with the PPP loan process or application process be paid?”
A common question arising from the PPP loan process is whether or not accountants can be paid for assisting with the application process of a PPP loan. According to the CARES Act, accountants or other agents can not be paid directly by the business owners for assisting with the PPP loan application.
The CARES Act specifically provides that agents cannot be paid directly for preparing the PPP loan application. There are certainly some services collateral to that, that I think fall outside that scope, and can be billed, not a problem. But be aware that the Act provides for a specific process for being compensated, and it’s actually through the lender. So my general practical advice is: You may want to start out early in the process. To the extent this loan program continues, start out early in the process and connect with the lender, so that they know that you’re assisting with that and that you can facilitate that payment within the confines of the Act.– Jason Freeman
While accountants can’t be paid by the business owners, they can receive compensation from the lender of the money — the bank from which the PPP loan is coming from. While helping your client fill out the PPP loan application, you should also contact the lender to ensure that you are paid for your services.
Want to learn more about the Payroll Protection Program?
Here at Gusto, we’re so thankful to be partnering with CPA Academy and supporting their mission to create accounting education that’s free and accessible for everyone. If you want to learn more about the PPP and CARES Act, check the first part of this CPA Academy webinar — “An Overview of PPP and the CARES Act” — and visit our COVID-19 hub to learn more about relief loans.
You can also access additional free resources on CPA Academy’s website and sign up for live webinars and courses on all things accounting. By attending these webinars, you are also eligible to receive one CPE credit per webinar, and it only takes 24 hours for that credit to be issued.
And if you’re interested in partnering with us, we’d love to let you know more about our programs and what we provide. We are truly living in unprecedented times, and it’s vital that accountants are armed with the best knowledge to advise their clients while also making a living themselves. Here at Gusto, we want to help you do just that. Click here to learn more about becoming a Gusto partner!