PPP Alert: New Shot for Your Tax-Free Cash

Did you miss out on the first two opportunities to receive your tax-free Paycheck Protection Program (PPP) cash?

Many did miss out. Why?

One reason: the word “loan.”

Who wants a loan? No one. Well, almost no one.

But who wants a cash gift, tax-free?

If you do, read on for the details. But first, you should know that the big picture works like this:

  • You obtain your PPP tax-free monies from a lender (it’s called a “loan,” but watch that word disappear as you read this article).
  • You spend all the PPP money on yourself if you are self-employed or operate as a partnership; on payroll (including pay to you, if that applies); and on other covered expenses such as rent, interest, utilities, operations, property damage, suppliers, and worker protection.
  • You apply for loan forgiveness and achieve 100 percent loan forgiveness, which is easy-peasy when you spend 60 percent or more of the money on payroll (and yourself if you are self-employed or a partner in a partnership).
  • You deduct the expenses that you paid with the PPP loan monies that were forgiven.

New Money on the Table

The new COVID-19 stimulus act sets aside $35 billion for first-time PPP applicants, with $15 billion of that made in loans for first-time applicants with 10 employees or fewer or made in amounts less than $250,000 to businesses in low-income areas.

New Deadline

The new deadline of March 31, 2021, replaces the expired deadline of August 8, 2020.

The monies available in this new round of PPP funding are on a first-come, first-served basis. Don’t procrastinate. Get your application for your first-time PPP monies in place now.

First-Draw Rules

The first piece of good news is that the new, favorable PPP rules in the new stimulus law apply as if they were in the CARES Act that was enacted a little more than nine months ago, on March 27, 2020.

The second piece of good news is that myriad changes made by the Small Business Administration that affect the loan application and forgiveness process have been clarified during the past nine months.

The third piece of good news is that the lenders have a better idea of what they are doing, so you can spend less time applying for your free PPP money.

What’s the Limit on My Cash Infusion?

You have a $10 million limit on your initial PPP loan. For most small businesses, that’s not likely to come into play.

In general, the real limit is 2.5 times your business’s defined or deemed 2019 payroll. The deemed payroll for a proprietorship is based on the owner’s Schedule C net profit, on line 31 of the 2019 Schedule C. For partners, it is based on a more complicated calculation of 2019 self-employed income, as adjusted.

Example. Susan has a 2019 defined payroll for PPP purposes of $1,200,000, or $100,000 a month. She operates a dental practice. Her PPP cash infusion is $250,000 ($100,000 x 2.5).

Planning note. The PPP first-time loan process is not complicated. The lender applications make the process pretty clear.

What Do I Have to Spend the Money On?

Under the new rules, you pick a spending period between eight weeks from the origination date of the loan and 24 weeks from that date. To achieve 100 percent forgiveness, during this period you must use 60 percent or more of the monies for defined payroll.

Example. You obtain $100,000 in first-draw PPP monies. You spend the entire $100,000 during the 11 weeks immediately following the date you received the loan—$65,000 for payroll and $35,000 for other covered expenses. You qualify for 100 percent forgiveness.

In addition to payroll, covered expenses include the following:

  • Rent
  • Interest on mortgage obligations
  • Utilities
  • Operations expenditures
  • Property damage
  • Supplier costs
  • Worker protection

What If I Spend Less Than 60 Percent on Payroll?

Let’s say you obtain a $100,000 loan but use only $48,000 (48 percent) for payroll. The PPP rules limit your total loan forgiveness to $80,000 ($48,000 ÷ 60 percent). That’s still a great deal.

Takeaways

Keep the big picture in view. It works like this:

  • You obtain your PPP tax-free monies from a lender.
  • You spend all the PPP money on yourself if you are self-employed or operate as a partnership; on payroll (including pay to you, if that applies because you operate as a corporation); and on other covered expenses such as rent, interest, utilities, operations, property damage, suppliers, and worker protection.
  • You apply for loan forgiveness, and you achieve 100 percent loan forgiveness when you spend 60 percent or more of the money on payroll (including pay to yourself if you are self-employed or a partner in a partnership).
  • You deduct the expenses that you paid with the PPP loan monies that were forgiven.

You will not find a better deal than the PPP. If you are eligible for initial PPP monies, get your application in place now.

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