The Paycheck Protection Program Can Offer Financial Relief!
Updated as of July 4, 2020
Update April 23, 2020: Congress has just passed a law to add new money into the Paycheck Protection Program. Go to the SBA website now and look for signs that they have opened up this program to receive new applications.
The Paycheck Protection Program is designed to help keep you in business during this COVID-19 crisis by offering you a loan, much or all of which you do not have to pay back!
This loan can be used to replace eight weeks [Update: now 24 weeks] of your lost profit and pay for other expenses, including rent, mortgage loan interest, utilities, and other debts related to your business. It can also be used to pay employees and employee benefits such as health insurance premiums, paid sick or medical leave and retirement contributions.
This new program allows providers to receive thousands of dollars for eight weeks [now 24 weeks] of eligible expenses. It also offers the opportunity to borrow money for beyond this time period at a very low interest rate. This free money can be invaluable in helping you survive these tough financial times.
Previously I wrote about another SBA loan called the Economic Injury Disaster Loan (EIDL) program that offers up to $1,000 in a forgivable loan for each employee, counting you as an employee (A forgivable loan is one you do not have to pay back.)
Determining Your Average Monthly Lost Profit
You can borrow money to receive up to 2.5 months of your average monthly lost profit. How do you determine what your average monthly lost profit is?
If you were in business in 2019:
Calculate your average monthly lost profit by looking at Schedule C, line 31 of your 2019 tax return. That represents your total profit for 2019. Divide this number by twelve. That represents your average monthly profit that you are losing in 2020. Update: If you haven’t filed your 2019 taxes, do your best to fill out Schedule C for 2019. You probably know your income and estimate your expenses.
For example, let’s say you were in business for all of 2019 and your total profit for the year was $36,000. That means your average monthly lost profit in 2020 was $3,000 ($36,000 divided by 12 months). You could therefore apply for a maximum of $7,500 under this program ($3,000 x 2.5 = $7,500).
Other Expenses
Besides money for your average monthly lost profit, you can also use the money for the business portion of other expenses: rent, utilities, mortgage loan interest, and expenses for your employees including health insurance premiums, paid sick or medical leave and retirement contributions. However, the total amount you can get under the forgivable loan is 2.5 times your average monthly payroll. Now let’s say your monthly bills are:
Utilities: $500
Utilities are defined as gas, electricity, water, internet, telephone, and transportation. Providers can count their Time-Space Percentage of gas, electricity, water, internet and a second phone line used for their business. Providers can count business trips at $.575 per mile for 2020.
Mortgage loan interest: $500
Total monthly expense: $1,000
Multiply these monthly expenses by your Time-Space Percentage and then multiply by two to determine how much you can use under this program for these expenses for [up to 24 weeks]. For example, if your Time-Space Percentage was 30%, you could use $600 of the money for these expenses ($1,000 x 2 months x 30% = $600). Remember, if the total amount you received for payroll was $6,000 ($3,000 average monthly payroll x 2 months), you could spend $600 on these other expenses and $5,700 on payroll.
Once you enter your average monthly payroll and multiply it by 2.5, that represents the maximum you can receive under the PPP. The amount you spend on other expenses can't be more than 25% [now 40%] of this total. So, if your other expenses were $600 and the total you received was $6,000, that represents 10% and you are below the 40% thresh hold.
Important Note: If you are not sure how to calculate your average monthly lost profit or average monthly payroll costs for employees, do your best to estimate them and put a number down on the form. Your bank will go through these numbers with you and you can modify them later. Be sure to ask about how much of the loan will be forgiven for the first eight weeks, and how much of the loan you will have to pay back.
You can use the money for purposes other than has been identified above, but that money cannot be forgiven. So, if you use the money to build a deck or remodel your kitchen, the loan is no longer forgivable and must be paid back at 1% interest. The loan is due in two years [Update: now 5 years] and all payments are deferred for six months [Update: one year]. You can pay off the loan earlier without penalty. . You do not need to make a personal guarantee, no collateral is required and there are no loan fees.
How do I apply for the loan?
The loan application form is a simple two-page form.
If you are self-employed, check this box at the top of the form. If you are incorporated, don’t check any of the boxes at the top of this form.
If you have a business legal name, enter it. If you don’t, enter your own name.
Enter your Employer Identification Number (EIN), or your Social Security number if you don’t have EIN.
“Average Monthly Payroll:” Enter your average monthly profit (not gross income), using your 2019 Schedule C, line 31 divided by 12 months. If you haven’t completed your 2019 tax return, fill out Schedule C to the best of your ability. So, if you average monthly profit was $3,000, multiply it by 2.5 and enter $7,500 in the next box. If you have employees, add their average monthly payroll amount to your monthly profit before multiplying by 2.5.
Note: Even though you can apply to borrow up to 2.5 months of your average monthly profit (plus wages for employees), you may not want to borrow this full amount. Or, if you do, some if many not be forgivable. Don’t worry about this now. Put down your best estimate. You can make an adjustment later with your banker.
Number of employees – Enter 1 if you have no employees, or 1 plus the number of employees.
Applicant Ownership – Enter your name, title (“owner”), and 100% for Ownership %.
Check the appropriate boxes for the rest of the first page of the form
Note that question 4 asks if you have received an SBA Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020. If you answer yes, you are asked to fill out addendum A. But the SBA has not yet released addendum A! Don’t worry about this before submitting this form to your local bank.
Enter your initials on the lines on the second page of the form and sign it
Once you have completed this form, contact your local bank or credit union [or online service such as PayPal]. Ask for an appointment with a banker to get a Paycheck Protection Program loan. You can apply for this loan/grant on and after April 10, 2020. [Update: the deadline to apply is August 8, 2020]. Your loan will be processed by a local bank that has been approved by the SBA. Your local bank may or may not participate in this loan program. You may have to shop around and find another bank or credit union to help you. You must have been in business before February 15, 2020.
Your banker will ask you for your 2019 tax return plus additional information, such as payroll documentation, or a balance sheet before they will process the loan. It is unknown at this time how long local banks will take to process your loan. The deadline for applying for this loan is August 8, 2020. You can apply forgiveness of the first eight weeks of the loan through your local bank that gave you the loan.
Balance Sheets and Profit/Loss Statements
Your banker may ask you for more than your last tax return. They may ask for a balance sheet or a profit and loss statement. What are these? In short, a balance sheet is a current statement of your assets and liabilities (home much income and business property you own and how much debt you have). A profit and loss statement shows how much income and expenses you have for a month or longer.
Note: Many family child care providers may have never worked with a bank to receive a loan. Applying for a loan may seem intimidating. Although this PPP loan program is intended to distribute money quickly to self-employed business owners, your bank may or may not make this process more difficult. Bring in your spouse or tax professional or friend with you to the bank interview. Don’t get discouraged if you are asked for additional records about your business. This program can give you thousands of dollars of free money. Hang in there.
Although the PPP can seem complicated, it’s still worthwhile applying. I encourage everyone to apply. Congress may pass new laws that will offer additional resources for family child care provider. I will write about them if this happens.
Unemployment Benefits
Would receiving the forgivable loan impact your ability to receive unemployment benefits? Probably yes. It's likely that you would no longer qualify for unemployment for the weeks you receive the PPP loan.
Question: Can I apply for both the PPP and the Economic Injury Disaster Loan (EIDL) program?
Answer: Yes! If you receive the EIDL money it will reduce the amount you can get through the PPP program. This may mean you won’t get any money forgiven for the first eight weeks of the PPP program, but you can still receive the PPP loan amounts beyond the eight weeks that you will pay 1% interest.
Question: Can I use this money to pay my monthly mortgage payments?
Answer: No, only your monthly mortgage interest.
Question: Can I claim payroll costs if I have hired my husband or my own children?
Answer: Only if you treated them as employees and paid all proper federal and state payroll taxes, including any Social Security/Medicare taxes for your husband and children ages 18 and older.
Question: What if I haven’t filed my 2019 tax return? How do I calculate how much I can borrow?
Answer: Use your 2018 tax return as a guideline and talk to your local bank official.
Question: Can I use this money to pay an independent contractor?
Answer: No.
Question: If I’m an S or C Corporation, can I borrow payroll expenses for myself?
Answer: Only if you have been treated as an employee by paying payroll taxes.
Question: If I get a forgivable loan can I change my rule and not require parents to pay me anything while I’m closed?
Answer: Yes.
Question: Can my employees apply for this forgivable loan?
Answer: No, because they are not a business owner.
Question: Can I use this money to pay for supplies, training, food, a new computer or house repairs?
Answer: Yes, but none of the money for these items would be forgivable and you would owe 1% interest.
Question: When is the loan forgiven?
Answer: After the end of eight weeks up to twenty-four weeks, assuming you meet all the requirements of the loan.
Tom Copeland - www.tomcopelandblog.com
Image credit: SBA
