PPP SBA Loan: Is it right for you? Calculation guide, FAQs on the loan app and other options.
DISCLAIMER: I am not a loan officer, lender, employee of the government, or the state. I am simply a CPA that cares a ton for her clients that are struggling with all of the BRAND NEW information regarding the CARES Act and SBA Loans. All opinion is simply an interpretation of the CARES Act and not to be used as support or guidance for applying for a loan or any other financial related advice.
If you haven’t applied or were in the process:
Prepare your documents because it is likely there will be more opportunities for SBA programs. (tax returns, prepare profit and losses, gather payroll documents)
Talk to your lender to get in the “queue” of people applying. They may still accept applications just to have them ready for when funding comes back.
UPDATED as of 5/1/2020 @ 3:25PM PST
I’m writing this to break down who this loan is made for, determine if you’ll benefit, and to bring some understanding to you so that YOU can make a decision.
Unsure of what loans I’m talking about, whether you qualify or the terms of them?
Read this first to get an understanding, then come here to think about the best next move.
Want updates on relief other than loans? See my up to date blog here.
TABLE OF CONTENTS
FAQs on filling out the application
What is the purpose of this loan?
I think it’s important to note why they made this loan. The intention is to retain employees and keep unemployment down. Therefore, the forgivable portion and calculation is all based on payroll costs.
If you don’t have much payroll or are self employed, you are still qualified but it just wasn’t designed for you. But read on before you give up.
Also, this loan is not meant to replace income. It is not to put money in your pocket, its to keep jobs and pay expenses that can’t be paid because of Covid-19.
The funding for this loan is 349 billion, considering that there are about 30 million businesses that qualify… there is a serious lack of funds.
Okay sure, I qualify but should I take out this loan?
No easy answer, and you ultimately make this call. But here are my general thoughts in various scenarios:
Self Employed with no employees (freelancers, independent contractors, single member llcs) –
The loan amount is going to be based on your self-employed income, your gross sales less expenses (pretty much what was taxable on your tax return last year).
Look at line 31 of your Schedule C of form 1040, that number,
If you had losses the last year or have low income, this is just probably not a good loan for you. However, if you had income it couldn’t hurt to see how much you could get below.
NOTE: The calc for what is forgivable is very different for these types of businesses. See how below.
S Corps with only officer wages –
You can only include W2 wages (not your draws!), so if you had a low wage then you are also super limited on this loan. This portion of the Act applies to you in that they are trying to keep you “employed” even though its just you.
Let’s say you have a $40,000 annual wage – that computes to $8,333 which is fully forgivable. It’s something!
All other qualifying businesses with employees –
This loan was designed for you – to retain employees (including yourself as an employee). If it is high priority to either keep or hire back your crew, this loan is going to greatly help with that. If you are downsizing and not planning to rehire etc., you will likely not be able to get the loan forgiven.
You just aren’t sure what your hiring goals will be or if you’d be able to rehire in the next few weeks.
That’s okay. What is great about all of this is you have options:
You can apply anyways - the whole process and funding will take weeks so you still have time to decide and ultimately turn it down.
Apply and take the money - if you end up not using it for payroll you simply pay the loan back.
NOTE: you do need to go into the loan with the intention to spend it on payroll.
Your purpose is to keep your business afloat…right?? So at the end of the day if you get this loan and it isn’t 100% forgiven because you didn’t get the ratio just right, it has a 1% interest rate and no prepayment penalty!
An SBA loan with this rate is unheard of!
You do not know how long we are in this crisis, there is just not much risk here to take the loan with the intention to use it towards payroll and pay it back early in case you don’t need it.
For some perspective: $30,000 loan x 1% = $300 ANNUALLY!!!
Would you pay $300 (likely a fraction of that) in order to have a $30k safety net until things go back to normal???
Still on the fence about whether you should apply?
Here is what I recommend:
1. Determine how much you qualify for
2. Determine if you can do what it takes for it to be forgivable (maintain employees, rehire, etc.)
3. Talk to your lender
Calculating the PPP
There are 3 different ways to calculate this and it depends on if you are a new or existing business before 6/30/19 and if you are seasonal or not.
I have created super simple tools to guide you through calculating this for you:
For businesses that have employees (including yourself):
Use this calculation if you have a seasonal business. **NOTE 5/4 - If seasonal you can now use any 8 week period btwn 2/15-6/30
Use this calculation if you are non-seasonal and in business prior to 6/15/19.
Use this calculation if you are non-seasonal and NOT in business in prior to 6/15/19.
For self employed people who don’t have employees:
Use this calculation if you have a seasonal business.**NOTE 5/4 - If seasonal you can now use any 8 week period btwn 2/15-6/30
Use this calculation if you are non-seasonal and in business prior to 6/15/19.
Use this calculation if you are non-seasonal and NOT in business in prior to 6/15/19.
Now that you know what the loan could be, how much is forgiven?
At least 75% of the funds must be paid towards payroll costs. No more than 25% can be paid towards mortgage interest, rent, or utilities for it to be completely forgivable.
Again, this loan is still pretty incredible even if you aren’t able to keep it 100% forgivable.
How is the forgivable amount determined for a independent contractor or gig worker that files a Sch C?
Determining what is forgivable is unique for independent contractors. How can you prove that you paid yourself payroll when you don’t have payroll? Well the SBA seemed to somewhat simplify things.
For the payroll portion you are allowed eight weeks (8/52) of total 2019 income (line 31 of your Schedule C of form 1040) to be forgivable. Huh? see example below.
Example: Sch C line 31 (your net income) is $96,000.
Step 1: Determine loan amount: $96,000/12 = 8,000 x 2.5 = $20,000
Step 2: Forgivable Payroll Portion: $96,000/52 weeks = $1,846/week @ 8 weeks = $14,769
There have been questions on how to show that you’ve paid yourself. With this calc there isn’t anything to prove, you can just pay yourself (deposit into your personal account) and it will be forgiven.
Step 3: Remaining Forgivable Portion: $20,000 - $14,769 = $5,231
This amount must be paid to mortgage interest, rent or utilities - NOTE: This cannot be your home office if you work from home.
I suspect many self employed people will not be able to utilize the non-payroll portion because they work from home and will either end up with a loan or paying that piece back.
FAQs:
Can the lender postpone disbursing my funds so my beginning date will be delayed?
No, once approved the lender has 10 days to disburse funds and the 8 week period starts the day of disbursement.
If I’m a S corp, do I include myself in number of employees?
Yes.
Do I include subcontractors/1099 workers as employees?
No.
I applied for the EIDL loan, what do I answer when they ask how much of the grant I received if I haven’t gotten anything yet?
My opinion is to put zero if you haven’t received anything, and then if/when you receive it then talk to you lender.
Can I use the funds to pay subcontractors?
You can but it won’t be forgivable.
Can I apply for unemployment AND get the PPP?
The only guidance that we’ve received regarding unemployment and PPP is that you cannot take unemployment during the 8 week period of the PPP. There hasn’t been written anything that outside of this period there are issues filing for unemployment. Having that said, they could close this loop hole and allow only one at any time.
Okay after reading this you realize the PPP isn’t for you…
How about the Emergency Injury Disaster Loan (EIDL)?
The purpose of this loan is for disaster assistance. Meaning that your business has taken a significant economic hit and there are expenses everywhere going unpaid because there are no funds coming in. It is much more of a cash injection to keep your business running regardless of employment.
The EIDL is the one that comes with the “up to” $10k grant. $1k per employee and the loan portion is capped at $15k.
However, general guidance has been – apply and see what happens. You will likely be contacted by a lender and go from there.
Here are some reasons the EIDL could be a better fit:
1. No restrictions related to your payroll, I believe its just based on credit score.
2. Lesser restrictions on what to spend the LOAN portion (not the grant) on – it can be on other things than just payroll.
3. Long term – 30 years
4. Low rate – 3.75%
None of this is a fit! Wah!
Okay, I see you.
If you have actually taken a hit and have stopped revenues, you are likely qualified for unemployment. I know you think you don’t qualify, but they’ve temporarily lifted a ton of restrictions.
See my section in my other blog for the expansion of unemployment in relation to the CARES Act.
Also see my section on the employee retention credit on my other blog.
Did you find value in this info and want to thank me?
There are a lot of CPAs who are charging for consultations right now. It just does not sit well with me to do that. I want to give all the information I possibly can to help you all.
The best thanks I could get is a donation of even just a dollar to Meals on Wheels - this is where I’m volunteering my time during the coronavirus outbreak.
Sources:
US Department of the Treasury [Docket No. SBA-2020-0015]
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