On December 22, 2020 Congress passed the stimulus bill which provides for new for Paycheck Protection Program loans and other small business relief. Read more about that legislation and apply for a PPP loan here.
If it feels like the Paycheck Protection Program has evolved since it was signed into law about a week ago, you wouldn’t be alone. I can’t count the number of times I’ve been asked over the last three or four days, “How much can I borrow and what can I use PPP loan funds for? Since I don’t work for the SBA or the Treasury, am not an attorney or a financial advisor, what I am about to share is based soley upon my understanding of the Paycheck Protection program and advise you to visit with your attorney or a trusted financial advisor to discuss how this information would apply to your business and individual circumstances.
How Much Can I Borrow With a PPP Loan?
The West Virginia District Office of the SBA recently shared a brief, but informative outline of both the EIDL loan program and details concerning the PPP loan program. It included guidance on both loan amounts and approved use cases for a PPP loan.
“The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits.
“Funds can also be used to pay interest on mortgages, rent, and utilities.
“[The] entire loan amount may be forgiven.”
Loan amounts up to $10 million are available based upon a calculation of 2.5 times the amount of your average monthly payroll costs for the last 12 months. If your business is a seasonal business, the guidance from the SBA Dated April 7, 2010 states:
“In evaluating a borrower’s eligibility, a lender may consider whether a seasonal borrower was in operation on February 15, 2020 or for an 8-week period between February 15, 2019 and June 30, 2019.”
If your business was in operation on February 15, 2020, but not for the entirety of the previous 12 months, previous guidance from the SBA was to submit the financial records you have that reflect your payroll expenses for the period of time your business was in operation.
Eligible businesses include:
- Small businesses with 500 or fewer employees (some exceptions exist for those businesses that meet the SBA size standards for specific industries).
- Eligible non-profits (501(c)(3) organizations
- Tribal businesses
- Sole proprietorships
- The self-employed
- Independent contractors
Over the last few weeks there have been a lot of questions regarding independent contractors and whether or not they would be included in payroll calculations for the PPP. The SBA says they may not, and offers the following guidance for independent contractors:
“Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. However, an independent contractor or sole proprietor will itself be eligible for a loan under the PPP, if it satisfies the applicable requirements.”
If you have any further questions regarding the payroll calculation applicable to the PPP, we suggest you consult with your accountant or CPA to determine how to make this calculation for your business.
What Can I Use Paycheck Protection Loan Funds For?
There are specific restrictions for what PPP loan funds may be used for. The focus of the PPP loan program is to help you keep your employees on the payroll for the next 8 weeks. Paycheck Protection Program loan proceeds should be used (at least 75%) for approved payroll purposes the SBA identifies as:
“• Salary, wages, commissions, tips (capped at $100K per employee)
“• Employee benefits including costs for vacation, parental, family medical or sick leave
“• State and local taxes assessed on compensation • Most will use average monthly in 2019 (capped at $100K per)
“• For Sole Proprietors: wages, commissions, income, or net earnings from self-employment (capped at $100K)
“• Seasonal businesses: average monthly Payroll Costs between Feb 15 and Jun 30 (capped at $100K per)
“• New Business: average monthly Payroll Costs from Jan 1 to Feb 29 (capped at $100K per)”
There are some additional approved use cases, provided they were obligations that predated February 15, 2020. They include:
“• Interest on mortgage obligations
“• Rent under lease agreements
“• Utilities”
What if I Use the Funds for Something Else?
If you use PPP funds for unauthorized purposes, the SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will likely face fraud charges. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, the SBA will have recourse against the shareholder, member, or partner for the unauthorized use. In other words, there are consequences for using these funds for other than the approved uses.
Make sure you’re bookkeeping is up to date and keep good records. Your bookkeeper just became your best friend. Sloppy bookkeeping could prove to be very costly right now.
Please keep in mind this information is changing rapidly and is based on our current understanding of the Paycheck Protection Program. It can and likely will change. Although we will be monitoring and updating this as new information becomes available, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-time funding options with one of Nav’s lending experts, please contact us.
This article was originally written on April 7, 2020 and updated on January 11, 2021.
I own a machine shop with around a dozen employees. Our workflow has remained steady as we do some essential work here. Can I use my existing cash flow to make equipment purchases and just move my PPP loan to cover payroll?
Michael – I don’t really understand your question. If you review the PPP forgiveness application it should help you understand how you can use your PPP funds and hopefully qualify for forgiveness. You’ll find the application and other information about PPP loans on the Treasury website here.
Can the office monthly telephone expense be paid as a “utility” expense with the PPP funds?
Hi Ty
Thank you for this summary about the PPP. I just signed my PPP loan docs and was surprised to see the fraud provision. I have read a lot about the program and my understanding was that if you used the loan proceeds for anything that was not eligible for forgiveness, the amount had to be paid back within 24 months of taking the loan. I had not read anywhere other than in your article and in the loan docs that it would be considered fraud! To re-start my business, I need to pay past due account balances with my vendors and pay COD on new orders, plus pay existing debt and other expenses. Am I violating the loan agreement and committing fraud if I use the loan proceeds for these expenses? That doesn’t make any sense! If I cant use those PPP funds for those items, I cant re-open! Thank you!
Stephen, EIDL may be a better fit for those other expenses.