How Can Small Businesses Use PPP Loans?

small business owner paying bills

Did you apply for and receive a Paycheck Protection Program (PPP)loan for your small business? Under the CARES Act, the Small Business Administration (SBA) will forgive up to 100% of your loan if it is used for designated payroll purposes. 

You’ll want to optimize the benefits of your PPP loan and achieve maximum forgiveness by following the guidelines set for by the SBA. Some of these guidelines are still being defined and clarified.

The main rule of thumb is that Paycheck Protection Program loans are designed to be used primarily for payroll costs.

How much can a business owner borrow from PPP? 

The amount your small business can borrow on a PPP loan is equal to 250% of your average monthly payroll costs for the last year or the 12 months directly preceding your PPP loan application. The maximum amount you can borrow is $10 million. (Kabbage can only process PPP loan applications up to the amount of $2 million.) Individual employee payroll costs are capped at $100,000 per year.

When calculating your payroll, be aware that only employees of your company (full time, part-time, or seasonal, whose principal place of residence is in the U.S.) can be counted. If you use independent contractors or freelancers, they don’t qualify as part of your payroll because they can apply for their own PPP loans and are considered small business owners. 

If you have a seasonal business, you can submit your financial records for the specific period of the year you were in operation. A judgment will be made based on your average monthly income for that period (assuming you were in business as of February 20, 2020, or between eight weeks between February 15 and June 30, 2019.)

How can a small business owner use PPP loan funds? 

The proceeds from your PPP loan may be used for limited purposes. 

What counts as “employee payroll costs”?

The bulk of your PPP loan proceeds (at least 75%) should go towards payroll costs, which have been identified as:

  • Salaries, wages, commissions (capped at $100,000 per employee)
  • Cash tips or the equivalent (based either on employee records or based on employer good faith estimates)
  • Vacation, parental, family, medical, or sick leave payments (unless covered under another program)
  • Separation or dismissal allowances
  • Employee benefits including
    • Group health care coverage insurance premiums 
    • Retirement fund payments
  • Payments for state and local taxes assessed on employee compensation 

If you are an independent contractor or sole proprietorship, your payroll costs are defined narrowly as wages, commissions, income, or net earnings from self-employment or similar compensation, such as being a freelance contractor.

What are Non-payroll Costs? 

In addition to payroll costs, PPP funds may also be used for the following purposes related to the operating expenses for the continuation of your business (these non-payroll costs cannot exceed 25% of your total loan proceeds):

  • Interest on mortgage obligations (but not principal payments or prepayments)
  • Rent payments
  • Utility payments
  • Interest on debt incurred before February 15, 2020
  • Refinancing an SBA Economic Injury Disaster Loan (EIDL)  made between January 31, 2020, and April 3, 2020.

PPP Loan Fund uses not eligible for forgiveness

The CARES Act expressly excludes certain types of payments from the definition of “payroll costs.” 

  • Any compensation to employees who primarily live outside the United States
  • Sick and family leave wages that qualify for the credit allowed under the Families First Coronavirus Response Act
  • Federal employment taxes that were imposed or withheld between February 15, 2020, and June 30, 2020, including both the employee and employer’s share of:
    • Federal Insurance Contributions Act taxes
    • Railroad Retirement Act taxes 
    • income taxes required to be withheld from employees

If you obtain a PPP loan and use your PPP loan proceeds for any purpose other than those specifically approved and not exempted under the CARES Act, you will have to repay those amounts to the SBA. 

If you use more than 25% of your PPP loan proceeds for non-payroll costs, the amount over 25% of your total loan proceeds will be ineligible for loan forgiveness. 

How Does PPP Loan Forgiveness Work? 

For all or part of the principal of your PPP loan to be forgiven, your use of the funds must meet specific qualifying parameters:

  • At least 75% of your loan proceeds must be used for payroll costs, and no more than 25% used for non-payroll costs
    • If you spent more than 25% of your loan proceeds on non-payroll costs, your loan forgiveness would be reduced
  • You must maintain your staff and payroll in numbers that match their annualized 2019 salaries and wages (up to $100,000 per employee)
    • If you reduced salaries or wages for any employee by more than 25% for employees making less than $100,000, your loan forgiveness might be reduced.
  • If you let employees go, you have until June 30, 2020, to restore full-time employment and salary levels
    • If you decrease your full-time employee headcount, your loan forgiveness will be reduced

The amount of forgiveness your PPP loan qualifies for will depend heavily on your payroll costs over the eight weeks beginning on the date that the lender makes the funds available to you (which must be no later than ten calendar days from the date of PPP loan application approval.) This period gives you time to hire back employees you laid off or furloughed and restore your small business to its original state.

You will need to submit a forgivable loan request to the lender servicing your loan. This request must include verifying documentation for:

  • The number of full-time equivalent employees 
  • The pay rates for each employee
  • Payments made on the eligible mortgage, lease, and utility obligations

For PPP loan forgiveness, you will be required to certify that the documents you submitted are accurate and true and that you will use the loan amount to keep employees working or rehire employees and to make eligible mortgage interest, rent, and utility payments. Your lender must decide on the forgiveness within 60 days.

Any portion of your loan that is not eligible for forgiveness converts into a two-year loan at a 1% interest rate. Your entire loan starts accumulating interest immediately, so you will also pay interest on the forgivable portion of your loan before it is forgiven. There is a six-month grace period before any payments are due.

Using your Paycheck Protection Program loan appropriately can help you rescue both your business and your employees to get ready for reopening. 

If you have not applied for an SBA PPP loan, you can apply online through Kabbage. Kabbage can help you with the loan application process and access relief funds through the SBA to keep your business running.

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