1.13.2021

Payroll Protection Program: How to Qualify in 2021

Written by Austin Chegini

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As we enter 2021, there is still much uncertainty regarding the COVID-19 pandemic and the virus’s effects on the economy. Consumers are not spending as much, and many businesses are facing financial difficulties. 

To address this issue, the United States government has approved $284 million in funding for businesses via the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. As of January 11, 2021, businesses in the United States can apply for Payroll Protection Program loans, commonly referred to as PPP loans.

What is the Payroll Protection Program?

PPP loans are subsidized aid approved by Congress to help struggling small businesses who cannot pay their staff. This funding is meant to fund payroll and necessary payments like rent and utilities. They are not meant to fund non-payroll related expenses. 

PPP loans can be used for:

  • Payroll costs: 
    • Salaries, wages, and  commissions up to $100,000
    • Replacements for cash tips or equivalent
    • Vacation, sick, family, and medical leave
    • Dismissal or separation
    • Retirement benefits
    • Health, vision, dental insurance
    • Taxes assessed on the compensation of employees
  • Mortgage interest payments (but not prepayment or payment of the mortgage principal)
  • Debt interest if it was incurred before February 15, 2020
  • Refinancing an SBA EIDL received between January 31, 2020 and April 3, 2020
  • Covered expenditures that are responsible for:
    • Operations
    • Product or service delivery
    • Payment processing, human resources, and sales
    • Accounting and supply chain management
  • Property damage costs
  • Supplier costs
  • Worker protection expenditures

Who can qualify for a PPP loan?

The Small Business Administration (SBA) set specific criteria to ensure only businesses in need receive this funding. 

Qualifying for a first-round PPP loan

If this is your first time applying for PPP, then you fall under this category.

To qualify for a first-round PPP loan:

  • Your business must have been operational before February 15, 2020
  • Your business must still be open and operational
  • Your business has fewer than 500 employees
  • If your business has multiple locations, you do not have more than 500 employees per location
  • You’re an independent contractor, sole proprietor, self-employed individual, or business partner 
  • You have employees for whom you paid salaries and payroll taxes are reported on Form 1099-MISC. 
  • You are a small business concern as defined by the SBA.

On top of this, you must claim:

  • You need the funds due to economic uncertainty.
  • You will use the funds to retain workers, maintain payroll, and/or use it for the purposes listed above.
  • You have no other PPP loans or EIDL applications for the same purpose.
  • You did not receive a PPP loan or EIDL for the same purpose.

Qualifying for a second-round PPP loan

For many businesses, the assistance provided tremendous benefits but has not been enough to cover all costs. If you received a PPP loan last year and need more assistance, you may qualify for a second draw. 

To qualify for a second-draw PPP loan:

  • Your business must have fewer than 300 employees (the updated program is focusing on small businesses)
  • You can show a 25% revenue reduction during any quarter of 2020 relative to the same quarter in 2019. OR, if you were in business for only the third or fourth quarter of 2019, you can show a reduction in revenue when compared against any quarter in 2020.

How can you show a 25% or greater reduction in revenue?

One method is to compare your annual gross revenue as reported on your tax return in 2020 to 2019. The other method is to compare your gross revenue in any quarter in 2020 with your revenue in the same quarter of 2019.

How much can you borrow in PPP loans?

The aggregate total amount any borrower can receive is $10 million - this includes First Draw and Second Draw loans. For businesses within a corporate group, the aggregate total is $20 million. These corporate businesses can’t receive more than $4,000,000 of Second Draw PPP Loans total.

With the updated language, $2 million is the maximum amount you can borrow on a Second Draw.

These loans are based on monthly payroll costs, and a business may qualify for up to 2.5 times average monthly payroll.

See how much you qualify for with Lendio’s PPP Loan Calculator.

Note: For restaurants, hotels, or live venues that fall under a NAICS code starting with “72,” your Second Draw amount can be 3.5 times your monthly payroll costs.

Do you need to repay PPP loans?

PPP loans are eligible for forgiveness if the funds are used as directed, even up to 100% of the loan principal. 

During the 24-week period after beginning the loan, the following costs can be forgiven:

  • Payroll costs 
  • Mortgage interest payments (but not prepayment or payment of the mortgage principal)
  • Payments on covered rent or utility obligations

Forgiveness for loans of $150,000 or less

The SBA has a simple one-page form for requesting loan forgiveness. 

You only have to list:

  • The number of employees you retained because of the loan
  • An estimate of the amount spent on payroll costs
  • Total loan value

Forgiveness for larger loans

In addition to the new PPP loans, Congress has approved:

  • Extended unemployment benefits for self-employed workers and independent contractors
  • Extended payment relief for another 3 months, and up to 8 months for certain disadvantaged borrowers. The government will take on payments, including interest, for up to a total of $9,000 per payment. 
  • $40 billion in EIDL grants
  • $12 billion for the Neighborhood Capital Investment program via the Community Development Institutions and Minority Development Institutions.

How can you apply for PPP loans?

The SBA has a list of approved lenders for its Payroll Protection Program. Use their Lender Match tool to find funding options.