Starting in March 2020, the Paycheck Protection Program (PPP) allowed for up to $669 billion in forgivable loans intended to help small businesses cover employees’ paychecks throughout the COVID-19 pandemic. As a small business owner, you may be wondering how PPP works and whether you’re eligible for first and second draw loans, along with how to apply. Here we’ll review what these loans are and how they work. We’ll also go over ways you can keep the application process smooth.

What Is PPP and How Did It Start?

The Paycheck Protection Program, or PPP, is a type of loan program that started on March 27, 2020, as a means to provide aid to small businesses during the COVID-19 pandemic. The goal was to provide businesses with incentive to continue paying employees and maintain operations. PPP is derived from the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and was initially worth $350 billion. Those funds would go toward American small businesses and provide them with eight weeks’ worth of cash flow assistance. These loans were 100% federally guaranteed with Small Business Administration (SBA) backing. 

Following the introduction of PPP under the CARES Act, the Paycheck Protection Program and Health Care Enhancement Act expanded PPP in April. This contributed another $310 billion to the program. Additionally, businesses had more time to spend the funds due to the Paycheck Protection Program Flexibility Act. Another expansion came in December, when a second stimulus package topped the fund with $285 billion and led to updates to eligible expenses. This final update to PPP also allowed for a second draw PPP loan for qualifying businesses.

Determining Eligibility for PPP Loans

A variety of business owners can apply for PPP loans, including sole proprietorships, small business owners, self-employed individuals, and independent contractors. Depending on the individual and business, different documentation will be needed to qualify. For example, sole proprietorships will be required to file a Schedule C that appears on their tax return, which details the proprietorship’s net profit. Meanwhile, independent contractors will need to submit both their Schedule C and Form 1099-MISC or 1099-NEC. Self-employed individuals, on the other hand, will have to submit payroll tax filings that they submitted to the IRS.

If business owners and individuals want to apply for a second PPP loan, they will need to prove that they saw a reduction in revenue of 25% or more. They can prove this by comparing revenue from one quarter in 2020 with the same quarter in 2019. 

How Do the First and Second Draw PPP Loans Work?

If you haven’t previously received a PPP loan, you may be able to apply for a First Draw PPP loan. This loan can help cover costs pertaining to payroll, which includes benefits. It may also help cover rent, utilities, mortgage interest, supplier costs and other costs of operation, damage to uninsured property resulting from looting or vandalism in 2020, and worker protection expenses resulting from COVID-19. Nearly any small business, sole proprietor, self-employed individual, or independent contractor can apply.

After applying for and receiving a First Draw PPP loan, it may be possible to apply for a Second Draw PPP loan. Generally, the terms for the second loan are the same as the first, but they will need to have:

  • Received their First Draw PPP loan and intend to or have used the total amount of the loan for the permitted purposes
  • Employed no more than 300 workers
  • Experienced a 25% or greater reduction in gross revenue between the same quarters in 2019 to 2020

How PPP Loan Forgiveness Works

Within 24 weeks of the date on which they signed their loan, recipients can have all expenses forgiven. These include payroll, utilities, rent, mortgage interest, property damage, and other costs that the First Draw or Second Draw PPP loans covered. However, you will be required to hold onto records and maintain accurate bookkeeping practices to show how much you actually spent. You will also be required to spend 60% or more of your loan on payroll to have the entire loan forgiven.

Applying for PPP Loans

When applying for PPP loans, you will need to provide a variety of records that clearly show payroll expenses. Documentation could include Schedule C forms for sole proprietorships and independent contractors, Form 1099-MISC, payroll tax forms from 2019 or 2020, payroll tax filings, and payroll processor records.

With so much documentation involved, it can be difficult to manage and prove profits without the right resources. One of the best ways to keep everything in order is to use a bookkeeping software package that organizes this data. With the help of software like Accurants, you can more easily gather and prepare all necessary documents, whether you’re applying for a PPP loan or loan forgiveness.

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