How to Spend PPP Money and Ask for Forgiveness
Now that you have received money from the Paycheck Protection Program (PPP), how do you spend it? And once you have spent it, how do you apply for forgiveness?
Many family child care providers have received money from the PPP. It's not taxable income and you won't have to pay it back. It’s not too late to apply as the deadline has been extended to May 31, 2021.
Spending PPP Money
Once you get the money deposited into your bank account, you can spend it on: Payroll (for employees or on yourself) and the business portion of mortgage loan interest, rent, utilities, food, COVID supplies and transportation. The business portion is your Time-Space Percentage or an actual business use percent. You must spend all of the money within 24 weeks of receiving it.
Payroll
You must spend at least 60% of the money on payroll. You can spend up to 100% on payroll for yourself. To do this, simply write yourself a check and enter “payroll” in the memo line. You can then deposit the check right back into your account. Or, transfer money from one bank account to another. If you transfer money, make a note that this money is for “payroll.”
You can spend the PPP money on payroll as fast as you want. I have previously written that you must spread it over 8 weeks. I was mistaken. You can spend it in one lump sum by writing one check for the full amount. Or, you can spread it out by writing several checks over a number of weeks. There is no rule about how much, or how fast you can spend money on payroll for yourself. You can use PPP money to pay yourself an amount that is larger than the amount you receive now from parents and other sources of income or the amount you earned in either 2019 or 2020.
Update: If you spend the PPP money in 8 weeks, you can't spend it all on payroll. You would have to spend some if it on non payroll expenses. What is the maximum amount you can spend on payroll over 8 weeks? It is your gross income $52,000 divided by 52 weeks = $1,000 per week x 8 weeks. So, in 8 weeks you could spend $8,000. You could spend this in one week or all at once. But, since the amount you would have gotten from the PPP is $10,416 ($50,000 divided by 12 x 2.5 = $10,416), you would need to spend the other $2,416 on non payroll expenses. You can only spend all the money on payroll if you spend it over 2.5 months. If you aren't applying for the Second Draw, this is not a big deal as long as you wait at least 2.5 months before applying for forgiveness.
Once you pay yourself, you can spend the money on anything you want. In other words, you cannot directly use PPP money to buy a swing set or make a home improvement. But after paying yourself you can use the money to buy these items. You do not owe any payroll taxes when you pay yourself and the money is not taxable income when you pay yourself.
Note: When you filled out the application form for the PPP money, you were asked to select a number of boxes indicating the purpose of the loan. These options included payroll costs, rent, utilities, covered operations expenses and more. It doesn’t matter which boxes you selected. You don’t have to spend money from a box you selected. In other words, if you selected payroll costs and utilities, you can spend 100% of the money on payroll costs if you want.
What about applying for the Second Draw PPP?
You can apply for the Second Draw PPP after you have spent the money from the First Draw PPP. You don’t have to wait 8 weeks before applying for the Second Draw. Again, I previously wrote that 8 weeks had to pass before you could apply for the Second Draw. Not so. Some lenders immediately begin the process of applying for the Second Draw even before you have received money from the First Draw. If that’s the case, be sure you spend the money fast enough to avoid receiving money from the Second Draw before you have spent it all. Any money not spent by the time you receive the Second Draw will not be forgiven.
Note that your local bank or online lender will have its own application form that will look slightly different. When applying for the Second Draw (or the First Draw), you will be asked to submit supporting documents. These documents are to show that you were in business before February 15, 2020. You can submit your 2019 tax return, bank statements from 2019 or early 2020, your child care license from 2019 or any other records showing that you earned income before that date. If you are having trouble getting your lender to accept your documents, apply through another lender.
Applying for Forgiveness
You can apply for forgiveness once you have spent the money from either the First Draw or the Second Draw PPP. You don't have to have applied for forgiveness from the First Draw PPP before applying for the Second Draw PPP. Contact your lender to begin the forgiveness process. Some lenders may not be willing to process your forgiveness application until they deal with the backlog of PPP applications. You have 10 months after receiving the PPP money to receive forgiveness, so don’t worry if there is some delay in your lender accepting your forgiveness application form.
The new Forgiveness Application Form 3508S (as of January 2021) greatly simplifies the forgiveness process.
With this new form, providers will not have to show how they spent the money they received to have all of their loan forgiven. This is a major step forward in reducing the paperwork burden of previous forgiveness application forms. The new form is for those who borrowed less than $50,000, which should mean all family child care providers can use it. Providers who are incorporated and have employees may have received more than $50,000 and therefore will use one of the forgiveness forms indicated below.
The new forgiveness application form is one page. It asks you how much money you received from the loan and how much you want forgiven. Then it asks you to certify that you followed all the rules associated with the loan. That’s it! You don’t have to submit any records showing how you spent the money. The SBA advises that you do save such records in case the SBA asks for them later (which is highly unlikely). It's possible that your lender may ask you to submit documents showing how you spent the money before they will submit your forgiveness application form to the SBA. This is another reason to keep your own records on how you spent the money. Note: Your records showing you paid yourself payroll would be your cancelled checks or other records you kept showing you spent it on payroll.
This new application form replaces two previous forms: Form 3508EZ and Form 3508. Providers should no longer try to fill out either of these forms (unless you are incorporated and received more than $50,000).
How to fill out Form 3508S
Business Legal Name: Use the name you put on your federal tax return. Your answer should match what you put on your PPP application form.
DBA or Tradename: If you have one, list it. You are not required to have one. Your answer should match what you put on your PPP application form.
Business TIN: Enter the same information you put on your application form
SBA PPP Loan Number: This should appear on the paperwork you got when your loan was accepted. If you can’t find it, ask your lender.
Lender PPP Loan Number: This should come from your lender (bank or online company).
PPP Loan Amount: Enter the amount you received.
PPP Loan Disbursement Date: This is the date the money was deposited in your bank account.
Employees at Time of Loan Application: Enter 1 for yourself and 1 for each employee you had when you applied for the loan.
Employees at Time of Forgiveness Application: Enter 1 for yourself and 1 for each employee you had when you applied for forgiveness.
Covered Period: Enter the date you received the money in the first space, and either 8 or 24 weeks later, whichever you choose.
If Borrower … Received First Draw PPP Loans of $2 Million or More…: Leave blank.
Amount of Loan Spent on Payroll Costs: Enter the amount you spent on either payroll costs for your employees or payroll costs for yourself. You must spend at least 60% of the PPP money on payroll costs. You can pay yourself with PPP money. You can spend 60%-100% on payroll costs for yourself.
Requested Loan Forgiveness Amount: Enter the same amount as your PPP Loan Amount from above. Don’t put a number here that is higher than the amount you received!
The rest of the form asks you to certify that you followed all the rules for this loan. Put your initial next to each paragraph. Note: The first paragraph asks you to certify that you spent at least 60% of the forgiveness amount on payroll. This includes payroll for yourself. Since you can always say that you spent 60% or more on payroll for yourself by simply writing a check to yourself, don’t hesitate to initial this paragraph.
Sign at the bottom of the page, date it and submit it to your lender.
There is a page two to this form that asks you for some demographic information about yourself. It is optional to fill out this page.
Note: If you are applying for forgiveness from the Second Draw PPP, you will have to submit required documents to show that you had at least a 25% reduction in your gross income from 2019 to 2020. You may have already submitted such documents with your initial application.
Worried?
As you can see, the forgiveness application process and form is a simple one. Some providers hesitate to apply for the PPP because they worry that they won't be forgiven. Don't worry! 98% of small businesses who have applied for forgiveness receive it! The only way you would not be forgiven is if you did not spend the money, or spent it on something that was not allowed. Spending it all on yourself addresses this concern. So apply! The PPP is not taxable income and you will not have to pay it back.
Tom Copeland – www.tomcopelandblog.com
Image credit: Small Business Administration
