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Overview of PPP1 and PPP2
As long as you had less than 500 employees and you had, economic uncertainty. So, as long as you had payroll, which means, you had W2 payroll, not 1099 guys on, on staff, but W2 or self-employed income, then, you could, you could qualify based on two and a half months of your payroll.
You can include benefits, health, insurance, retirement for employees. In that everybody’s capped at, a hundred grand per employee. So that was the upper limit. And, we’ve got a lot of money. There’s a lot of money flowing around. It’s pretty crazy to see how 2020 it turned out for a lot of clients.
It was either feast or famine, really. . People who had, have years of, of $3 million revenue, but not much net profit last year. You see them getting PPP loans for 300 grand coming in and, and, some people weren’t even affected. Like you’re talking about online e-commerce clients, if anything, they had a better year, so everybody got, everybody could get the first PPP, loan not every buddy, but, 90% of businesses.
And then the second one is really more targeted to people who had a dip in revenue of 25%. It could be on a quarterly basis or an annual basis. If you have a 25% dip on an annual basis that you will by default have a quarter, a 25% or less. That one’s newer to come out in the, in the past few months, you, you would already have to get the first PPP loan.
And spend the money already to, to apply for the second one., everybody’s scrambling, they’re running, running their P and L’s for 2019 and 2020. And they’re looking at it for the past eight quarters. What does my revenue look like? Some people are right on the line. They’re like, Oh man, it went down 24%, 23%.
As of right now, it’s based on your, your accounting methods of some people will run in on the cruel. Some people will run it on cash it’s, as of right now, before any other guidance comes out to be conservative, go with the, accounting basis that you’re filing tax returns on, which for the most part is cash basis.
People will use accrual if it makes sense or they have to. Bookkeeping has been super important in the past two years because you got to have good books to really know if you’re going to have a 25% decrease or not. It can’t just be, yea, I had a 25% decrease because you’re going to have to true it up.
When you apply for the loan, you don’t have to get the loans under 150 grand. You don’t have to prove it right then. But when you apply for forgiveness with this second PPP, you’re going to have to show the dip in, in gross receipts. So. It’ll it’ll come up and, the money, you can use it on payroll.
You can use it on non-payroll costs. 60% you have to use on payroll costs. If you want it all forgiven, the other 40% can or cannot be. You can do it all on payroll, if you want, which. We’ll probably get into later when we talk about the employee retention tax credit, if you want to or not, but other costs, rents utilities, there there’s other costs that you can, you can use the PPP funds for.
Do you have to be forgiven for the first PPP before PPP2?
You don’t have to be forgiven, but you had to have spent it and you have to certify that you will that you have already spent it, but you don’t technically have to have the forgiveness. So banks are making you do it, but, but you don’t have to already have forgiveness.
Some people were, were hot to get forgiveness done. They’re like, I want it off the books. I don’t want this loan on my books anymore, but it’s actually paying off for people who are waiting because now there’s an interplay with the employee retention tax credit, which early on you couldn’t do both.
You couldn’t get the PPP and the ERC is what they’re calling it. So, now there’s a reason why you would not want to file your forgiveness applications for the first round and use all your costs as payroll costs, because you kind of want to save those payroll costs to use them for the ERC, if you qualify.
The Employee Retention Tax Credit
While we’re on the topic, we’ll just kind of give you like a thousand foot view of the ERC. The employee retention tax credit is. It is set up so that if you were shut down by the government, by an order to say, Hey, your business can’t be open right now. Like restaurants, any office, office stores retails.
Then during that timeframe, if you kept employees employed and you paid them, then, you’re going to qualify for a credit for paying them. And. For 2020, it was five grand per employee was the max and it got way better for 2021 it’s seven grand per quarter per employee.
How To Qualify for ERC
Number one, you have to have a shutdown per a government order. So, which is pretty it’s, it’s pretty broad because like here in Austin, there were city, there were County and there were state shutdowns for like the mayors and governors and, and it was pretty restricted, especially for like, Q2 of last year.
When we were in April, may, June, nothing was going on. Everybody’s freaking out. So it was shut down. If you, if you were paying employees, you most likely qualify for the ERC, unless you were an essential business and you were allowed to operate. So that’s the one way to qualify if you actually were not able to operate your business and there’s a partial rule too, you don’t have to be fully shut down.
You could just be partially shut down, meaning. Okay. You were at a restaurant and you had to pivot and only do take out, or, one of your lines of business, you couldn’t operate anymore, or your suppliers couldn’t operate and you couldn’t get your product. And so it’s pretty broad to be able to qualify under that circumstance.
And then the other way to qualify as if you had a dip in revenue, which is kind of similar to PPP for PTP, you needed a 25% decrease to qualify. For the ERC for 2020, you needed a 50% decline, which is that, you have to have a pretty big hit to go down 50% in a quarter. But a lot of people did for, for Q2.
Again, just when. The world kind of stopped. So you’ll qualify if you had a, a revenue reduction of 50%, regardless of if you had a government shutdown or not. And then for 2021, they dropped it to 20%. So if you have a 20% decrease in revenue for Q1 of this year, which we don’t know yet, the quarter is not over.
Compared to Q1 of 2019, then you’ll qualify. And Brian was talking before they actually got their first refund on employee retention, tax credits. So he he’s filing him for his clients now. And what you have to do is you have to file an amended payroll report to claim that credit. On a 9 41 X and and then the money will money will come back from the government.
So there’s a lot going on between those two, but that’s a lot of information, I think. Does anybody have any questions on that?
Question about Forgiveness of PPP1
Some banks are accepting them, but I’m here in early March, which is a week from now is chase to saying but I mean, every bank, they’re kind of, they’re kind of scrambling, like this is all new.
They keep changing the rules. So it’s just, we just gotta be patient with them, but, I wouldn’t be so worried about getting that in. It’ll get in, you have 10 months from the end of the cover period. So, if you got a loan in April, then add 24 weeks, then you’re probably in, September, and then you have 10 months from there.
So we had time you have until, at least the summer. But the, the, the one page deal or two page deal for 150 grand or less, it should be pretty painless. It’s really just going to be you, you initialing and signing . Yeah. Now you just want to be done with it, but, but yeah, the banks or the banks are just kind of, they have to, they have to rework their whole like internal kind of.
Just process of processing these, these applications and there was a new change this week on PPP. It was more for loan applications and not forgiveness, but there’s just been so much changing that they’re, they’re just being conservative and waiting. If I had to guess don’t quote me on this, but I would say by the end of next month, all PPP, one applications should be able to be forgiven.
Like the portal should be open by the banks, but, because otherwise it’s like, well, how much time do I really have, between when the 10 months runs out. But I think, I think they’ll all be opened up by the end of next month. But we’ll see. Anybody else on that employee retention tax credit, but that, one’s kind of that one’s kind of crazy.
Does PPP2 and ERC Apply To Contractors?
They do not apply to contractors. There’s a separate credit out there for self-employed individuals. That’s this new 7202 credit. Which is different, but it’s geared more for people or business owners who don’t have employees.
The 7202 Credit for Self Employed
They’re more self-employed they filed their, their schedule C’s on their individual returns or partnerships. The deal with that is you can get a credit on your personal return for days that you missed work because of Corona, whether it was you having it your spouse, having it. Your kids staying home from school because it wasn’t open.
So there’s up to 60 days up to 15 grand is the max. So that’s another one that it’s flying under the radar right now. But as people go to file their tax returns and their selves, they should be looking at that, that form 7202, it’s called and that’s not a payroll.
That’s on your actual income tax return on your 1040.
EIDL Loans – Summary and Options
Throw one more thing at you as the EIDL loans., those, those have been a shot in the arm for a lot of businesses where, and they’re open right now. Most people will get up to 150 grand and the interest rates pretty, good. 3.75%, and it’s over 30 years for payback to EIDL alone. So that’s getting cash moving for, for people who kind of had a rough year
Is Interest Expense on EIDL Tax Deductible?
Yep. Oh yeah. That’s deductible. Yeah. And one other crazy thing that happened was these SBA loans, people who already had SBA loans. Have had their payments made for them on behalf of the SBA during this whole process. .
And that’s been, tax-free also just like the PPP tax-exempt so, so that was a big one and people, you really couldn’t plan for it, but people who did have SBA loans and, I guess there were 7A loans or they just got them paid and they’re still getting paid. They extended it to .
Another thing out there, but any questions anybody’s gone, any of those crazy tax things that are out there? Let me know. Otherwise I’ll keep, keep rolling.
PPP2 For Businesses Under 20 Employees
This week they came out with changes for for this, for the, for the PPP applications for starting today for the next two weeks, they’re only going to process.
Applications for companies with 20 or less employees. And then they also made a huge change for, for schedule C filers. Those people who filed their business income and expenses on their personal, they don’t have a separate business tax return. They can now use their gross income instead of their net income, which is kind big deal.
So, if you had 200 grand come in, but you spent 150, okay. I netted 50 grand. Your loan was going to be based off 50. Now they actually are using that 200, but it’s still capped at a hundred. So, but your loan is essentially doubling for being able to use that, that gross, that gross income number. So that’s a big change.
There’s still more that needs to come out with that because people who already filed for loans are like, what about me? They’ll probably be able to go back retroactively.
What About Employees You Just Hired Or Are About To Hire?
For PPP, it doesn’t help you if you’re, if you’re applying. So when you’re applying now, you can use your 2019 salaries or your 2020 salaries, or you can actually use, but just the rolling last 12 months.
So, it wouldn’t help you get a bigger loan, but it would help you on your forgiveness app because you’re spending money in an eligible way for new hires. And then for the ERC, for the employee retention that counts, it’s just wages to keep people on, payroll. So, so those will be, those will be eligible costs.
You Can’t Use The Same Dollar for Forgiveness of ERC and PPP
The one thing is you can’t use the same dollar for both, for, for PVP forgiveness and for the ERC. So that’s why, when you’re submitting the forgiveness applications, You want to use as little payroll as possible. So you want to pretty much fill up the 40% non-payroll costs and then use the rest 60% payroll so that you save.
More payroll that’s eligible for the, for the ERC. So it’s kind of, kind of a weird deal. People who applied for forgiveness early, they kind of just probably only use payroll because it’s easier to, to, to back up. Cause a lot of the payroll companies like ADP and Gusto, they’re making reports that are PPP forgiveness reports.
So you just click a button and. Here’s my eligible expenses. And you can use that, but you can’t use the same dollar for both. So, you have to be delicate when you’re looking at submitting the forgiveness application and if it plays into your ERC calculation.
The forgiveness stuff is, it’s kind of hard for us to help unforgiveness because the forgiveness is it’s really just through email from the bank.
And, you’re kind of just going through the, the link, if you need to provide any information, double-check things, we help with. Those calculations, we’re helping out more right now is the employee retention, tax credit, helping them get those out. And that one is flying under the radar so bad people just don’t even know it exists.
And it’s crazy because before you couldn’t do both. You couldn’t do PPP and ERC. And then just in late December, they changed it up and they said, Nope, you’re eligible for both retroactively. So, we’re just every time we’re filing a business tax return, we’re making sure. Hey, did you apply for PPP wanting to, did you, did you look at the employee retention tax credit?
That’s like kind of on our checklist before we file any business tax returns this year, we’re making sure that’s done and I’m making sure it’s treated right to like the actual tax exempt income. Like when you, when you get relieved of your debt. Normally, debt relief is income. This is tax exempt income .
How Does EIDL and PPP Affect Your Equity Basis?
It has a interplay with your basis. If you’re, if you’re a pure partnership or an S Corp, it’s an increase to your basis too, which is way beyond the scope of this conversation, but it’s a good thing. And you want to make sure it’s done right. So if you guys have. S-corp or partnerships that you’re, that you own, that you’re filing tax returns.
You want to make sure your, your shareholder basis or your partner basis is increased by any, any loan, forgiveness, and for tax filing. If you reasonably believe the loan is going to be forgiven then, and you can, you can wipe it off the books as of the 20, 20 tax return. So you can make that adjustment to move it from liabilities out to tax exempt income, get it off the balance sheet. So it doesn’t doesn’t show up anymore. Even if you haven’t totally been forgiven gotten the acceptance from the bank account. I mean, the bank themselves. You, can still make that journal entry to take it off the books. And I’m just worried that people, will end up paying tax on, on it.
They’re not supposed to. For a while the IRS came out and said, that’s going to be taxable, or at least the expenses are not going to be deductible. And then in the late part of the year, they came out and said, Nope, you don’t, you can deduct all the expenses. There’s no income to pick up. So, really it’s kind of a double benefit.
What’s The Best Way To Apply For PPP?
So the small banks are definitely, the way to go. I mean, if you have an account already, then, when you log in, there’s a, Hey apply for PPP button. So they make it kind of easy, but we kind of sent all of our stuff for the first PPP, through a local smaller bank affiliated bank.
And there were rockstars, they got everything kind of handled, but it was a lot of work and a lot of the banks that I’m talking to now, they’re like, listen, we’re not doing applications for non-customers non-clients so like you got to have a bank account here, or at least tell us you’re going to keep a bank account here because they get paid from the SBA.
They get paid a fee to just to administer the loan. But, it’s between, I think 1% and 5%. But it’s just a lot of compliance for them. So the smaller banks, I would, I would go through them. So you could actually have a person to talk to just in general. I like smaller banks, myself, have a banker that you can actually pick up the phone and talk to.
Are There Any No No’s To PPP and EIDL Money Being Spent?
As far as like no-nos and what people are doing wrong. I seen, I seen people get too much of a loan just because they applied for it incorrectly and they included, they included 1099 pay. You can’t do that.
So, the banks, there was just like a mad rush to get it, to be processed that, they were kind of, they were just kind of taking your word for it., you give them something and, yeah, they’re good. But it was all just so new for them. So, and then I’ve seen people just miss for partnerships. For partnership, you can, you can include yourself employment, income, which is, your earnings as a partner, plus the salaries of your employees.
Do I Use Gross Pay Or Net Pay In My Calculations?
A lot of people didn’t they did not include themselves the first go around, so they kind of missed it. They missed out. And they also missed out on benefits., when you’re talking about health insurance and. And retirement contributions made by the company by the employer. Those count as far as your monthly pay and making sure that’s and then early on there were there was some, Nobody knew if you were as supposed to include the gross pay for employees, the net pay, and a lot of people included the net pay. So if you put, you pay your employee, Four grand for that, for the pay period.
But they only get a check up three grand. Some people were using that net three grand instead of the four. So they left a lot of money on the table because the way it was originally written like 12 months ago, it was, it was super confusing and even Gusto when they came out with, their payroll report, they included the lower amount.
Some people who’ve just rushed to get it out. Early on, they kind of undersold what they, what they should have got. And, some people kind of not, limit their employees at a hundred grand where, you need to limit it a hundred grand for what’s eligible.
So I saw that missed yeah, I mean, There’s been a lot.
I see a lot of owners pay themselves different way as obviously some people do guaranteed payments. Some people do like kind of random draws. Some people put themselves on W2. How do, how do people deal with that with PPP?
What About S Corps Vs Sole Proprietors?
When you’re an S corp you pay yourself reasonable comp on your W2, and then you also get a distribution. So just the W2 portion. For S corporations qualifies for partnerships. When you pay yourself, you pay yourself as a guaranteed pay or distribution. And for partnership, it’s a little different because on your K 1 there’s an income subject to self-employment tax number.
And some people calculate it differently. Some people just. Treat guaranteed payments as subject to self-employment tax. Some people w w we’ll treat their guarantee payments plus their, their net profit from the business. So really it’s just that box 14 net self-employment income that, that you need to use, but, but distributions themselves are not income.
It’s your guaranteed pay. And then if your box one ordinary income, your share of it is subject to self-employment tax. Then that counts. So, so it easy for partnerships. You look at the K one, you look at that box 14, and then for, for escorts, you really don’t look at the, you really don’t look at the net profit of the business.
It’s really just strictly W2 and you have to pay yourself a reasonable comp. So, a lot of people who, you don’t normally want to pay yourself a big salary because you have to pay all taxes on it. You got to pay the social security and Medicare when you’re an S Corp and, people always keep their, their salaries artificially low.
And then when PPP came around they’re like, Oh man, I can’t get a PPP loan because I don’t pay myself a big salary. So, it kind of came back to bite them on that. And then, partnerships there’s, really not much wiggle room there. You really should be subject to self-employment tax on all your earnings.
What About Schedule C (Contractors)?
Schedule C filers that is just basically your net profit or it was your net profit. Now it’s your gross. So schedule C filers probably may got the best out of everybody because you can literally make net $0, but still get a loan based off.
Based off a hundred. So, so you’ll at least qualify for 20 grand of the loan.
What Is A Schedule C Filer?
What you’ll see is like, if you were just an independent contractor, right? You just got, you just got paid via 1099. And, you might have some expenses for, for mileage or travel meals that then if you’re not, if you don’t have your own business, your own LLC taxes, the S corporate tax as a partnership, Then then you’re a sole proprietor.
You’re just filing a schedule C and then you could also file a schedule C if you’re, if you have an LLC, because an LLC can be taxed like so many different ways by default, if you’re a single member, LLC, you’re what they call it. Disregarded entity. You don’t, you don’t exist to the IRS. It’s really just whoever the owner is.
That’s where the income goes. So if Chris, do you have an LLC and you’re the single member. The IRS doesn’t care about the LLC. That’s all Chris. That’s going on your tax return. So schedule C is your, it’s your form where your income and your expenses go for your, your self-employment income. That’s not on a separate corporate or partnership tax return.
A lot of people have, consulting income., if you’re a driver, it goes to schedule C know, before you actually incorporate your. Schedule see that. And that’s where you write your expenses off too. So schedule C. There it is.
Should I Pay Off My EIDL Loan Faster Than Scheduled?
I mean, love cash. Cashflow is King, right? Especially low interest cash.
So if you have a need for cash and it’s. Easy to apply for there’s no loan, origination fees. It’s, there’s not a big underwriting process. So, if, if having another 150 grand in your bank, in your business bank account to help you and 150 is the max, but from what I’ve seen, most people will.
We’ll get that. If that’s going to help you with your expansion and your growth, then it’s not a bad idea. You can pay it back. I mean, you could always pay it off.
Is EIDL Personally Guaranteed?
So it’s not personally guaranteed.
So the assets of the business are the collateral for it. But those are not personally guaranteed, which is kind of crazy.
You have to have been in business as of February 15th, 2020. So yeah, you had to have, something, and also you have to fill out your prior 12 months revenue and I believe. The loan amount is based off of that. So if you have little to no revenue, they’ll probably say, Hey, we’ll give you a 10 grand loan.
When Should You Start The Application Process If Interested?
Get in, get in line now. I bet you, I mean, don’t bank on this, but, if they don’t spend all the money, they’ll probably end up pushing it back. They did the first time, but I wouldn’t wait. Well, and then that was the other thing is I’ve been keeping a close eye because there’s a little bit of a strategy for restaurants.
If they go in late, some of my clients who can afford to wait are going in later. Which will allow the 24 week period pushed out into Q3. So, then they can maximize the ERC in Q2. So I’m keeping a close eye on the liquidity of the program. And as of last week, it was about 45% exhausted.
And loan amounts seem pretty low. So I feel pretty good about the, the program not running out. And then that’s, twenty-five percent reduction quarter over quarter is, is going to keep a lot of people out of it and well, and just the 300 employee level as well.
And then also, I guess, one other thing there’s 2 million is the max, right? The first versus the second, right? So that’s another thing. See the, the, the first one obviously was, get the money out the door, save the economy. Here’s $10 million and now it’s, let’s press pause, make sure the smallest employees get it.
The banks are crossing T’s and dotting I’s now so much closer than they were a year ago. It’s backwards. It’s frustrating because many people going in for round two, it’s like, wait a minute. I already got round one and you guys didn’t need all, you didn’t need all this supporting documentation then, but they’re really trying to hone in on fraud.
One other thing is some banks, if you are getting the second one, you can use the same numbers from the first one. And it’s like, you’re, you’re gonna get the exact same loan amount. But if you use 2020, instead, you might actually, you might be getting a bigger, loan amount.
What If I Reinvested Most of My Potential Pay Into The Business?
I am one of those schedules C filers. So I’m a sole proprietor. And so I’m wondering on the application. Average monthly payroll. I didn’t really pay myself a lot. I put it like everything I earned back into my business.
It’s just going to be based off of your, your line seven, your, your gross revenue. So right before all expenses. So just the money that you brought in the income. Yeah, they just switched it. So you’re going to be able to get a much bigger loan than, than the first time around, because, if you brought in a hundred grand, but you spent a hundred grand, you get zero over the loan.
Now you actually get a loan based off of a hundred grand. This just changed this week. So, if you waited then you probably lucked out that you waited.
And if you had more gross income for 2020 versus 2019, then you want to get, your schedule, see your tax return filed for, for 2020, or at least prepared so that you can give them the 2020 schedule C that has a bigger number than 2019.
What If I Already Applied Once But Didn’t Hear Back?
Definitely apply and I would check on the status of your first one at the never got funded, then, maybe, maybe you can update the application. What I kind of worry about is them kind of saying, Oh, this is a duplicate application., we’re going to reject it so may, so you might have to do a little extra work just to make sure that it gets it gets pushed through as an original, an original loan request.
For you to say, Hey, I did apply originally through this, this other bank.