An Update on PPP Spending, Applying for the Second Draw and Forgiveness

The rules regarding the Paycheck Protection Program (PPP) are hard to understand. I hear daily from family child care providers who are confused about the rules, and I don’t blame them. Here’s an update to help you get a clearer picture of how to navigate the PPP program.

Can you apply for the First Draw PPP?

If you have not yet received any money from the PPP program, you can still apply for the First Draw PPP. The deadline is May 31st, though you want to do so asap! You can apply even if you don’t have employees. You must have been in business by February 15, 2020. The money you get from the PPP is not taxable income at the federal level, but may be at the state level, and you won’t have to pay it back. This is a fantastic deal! For example: If your gross income was $48,000 you would get $10,000! Apply now through your local bank or an online lender. It may seem too good to be true, but it’s true!

Can you apply for the Second Draw PPP?

You can only apply for the Second Draw if you previously received PPP money. To be eligible for the Second Draw you must show at least a 25% decline in your gross income from 2019 to 2020. You can show this on an annual basis or for any one quarter of the year. So, if your gross income was 30% lower in the second quarter of 2020 versus the second quarter of 2019, you qualify.

Gross income includes all money from parents, the subsidy program, the Food Program, and any grants you have received. Unemployment benefits are not gross income. PPP and Economic Injury Disaster Loan (EIDL) money as well as stimulus checks from the federal government are not gross income.

You will need to show documentation that you meet this rule. This can be shown with monthly bank statements, the Redleaf Calendar Keeper, the online software program KidKare, an Excel spread sheet, etc. It is important to be able to prove you meet the 25% rule. You may not be asked to show these documents at the time you apply for the Second Draw PPP, but your lender is likely to ask for this before you can apply for forgiveness. If you can’t prove you meet the 25% rule, you’ll either have to return the money right away, or pay it back as a 1% loan over 5 years.

When can you apply for the Second Draw?

Eight weeks must pass from the time you get the First Draw PPP until the Second Draw PPP is disbursed to you. You can apply for the Second Draw before the 8 weeks has passed. However, if you do so, you want to make sure you don’t accept the Second Draw money until after 8 weeks. Some lenders may accept your application for the Second Draw earlier than 8 weeks because they know it will take several weeks before they can process your application and more time for the SBA to approve it.

Lenders may have their own interpretations for when they will accept an application for the Second Draw. If your lender won’t process your Second Draw application, and you think you might still be eligible, contact another lender.

You must spend all of the money from the First Draw before you can receive money from the Second Draw. You must spend at least 60% of the money on payroll, either on yourself or on your employees. The other 40% can be spent on mortgage loan interest, rent, utilities, transportation, food and COVID supplies. If you try to spend the money within 8 weeks, so you can then quickly apply for the Second Draw, you won’t be allowed to spend all of the money on payroll for yourself. SBA rules say that you must spread out payroll for yourself over 2.5 months. Why? See below.* If you aren’t allowed to spend all of the money on payroll for yourself, you will have to show that you spent the rest of the money on non-payroll expenses within the 8 week period. If you can’t, because you don't have enough of these expenses, you will have to wait longer before you can apply for the Second Draw.

Therefore, I recommend that you wait at least 2.5 months before applying for the Second Draw, if you can, before the May 31st deadline. This will allow you to spend 100% of the money on payroll for yourself.

What about forgiveness?

Are you concerned about getting forgiveness, so you won’t have to pay back money from the First or Second Draw? You shouldn’t worry about getting forgiveness! 98% of small businesses who have applied for forgiveness have received it. You apply for forgiveness by contacting your lender who will have you fill out an application form. This form is simple to complete. The form doesn’t ask you to submit any documentation on how you spent the money, but your lender may ask for some documentation.

You can only apply for forgiveness after spending money you received from the First or Second Draw. I recommend waiting at least 2.5 months after you received the money before you apply for forgiveness. If you do so, you can then spend 100% of the money on payroll for yourself. You can spend it as fast as you want during the 2.5 months. That means you can write yourself a check for the full amount on day one.  If you apply for forgiveness before 2.5 months, you’ll have to show that you spent some of the money on non-payroll expenses.

Note: In the past I have written that spending money on payroll for yourself can be as simple as writing yourself a check or transferring it from one bank account to another. If you wait to apply for forgiveness after 2.5 months, you may not even have to do this. Rather, money sitting in your bank account can be automatically designated as PPP spending. I would probably still recommend writing a check or transferring the money to be on the safe side.

If you want to apply for forgiveness and your lender isn’t accepting your application form, it may be because they are overwhelmed with PPP loan applications. It may take them longer to get to forgiveness applications. You have 10 months from the time you received the PPP money to receive forgiveness, so I wouldn’t worry about this right now.

Summary

Apply for the First Draw PPP if you haven’t already done so. Wait 2.5 months before applying for forgiveness, so you won’t have to worry about how much you can spend on payroll for yourself.

I have previously written a number of articles about the PPP. I’ve not always been clear in everything I’ve written about this in the past. I’ve written that you can apply for the Second Draw after spending money from the First Draw, without indicating that you couldn’t get the Second Draw until at least 8 weeks had passed. I’ve also recommended that providers spend all of the PPP money on payroll for yourself, without explaining that you would need to spend it over at least 2.5 months before applying for the Second Draw or before asking for forgiveness. I apologize for any confusion. I hope this article helps answers some of your questions.

*Where does 2.5 months come from?

If you are going to spend all of the PPP money on payroll for yourself, why must you spend it over at least 2.5 months? Let’s say your gross income was $48,000 (Schedule C, line 7). Here’s how much you are entitled to get from the PPP: $48,000 divided by 12 = $4,000 x 2.5 months = $10,000. SBA rules use the following formula to determine how fast you can spend payroll for yourself: Take line 7 from Schedule C: $48,000. Divide it by 52 weeks = $923 per week. That’s how much you earned on average per week. Therefore, that’s the maximum you can pay yourself each week. If you paid yourself $923 per week, it would take you 2.5 months to spend it all ($923 x 2.5 months = $10,000). If you want to spend the PPP money on yourself in less than 2.5 months, you would need to spend some of the money on nonpayroll expenses such as utilities, food, etc.

Tom Copeland – www.tomcopelandblog.com

Thanks to Cyndi Cunningham in Minnesota, Gary Romano in New Jersey and Jane Lee in Connecticut for help in making sense of this. I’m solely responsible for any errors.

Image credit: Small Business Administration