How to Get Your PPP Loan Forgiven and Apply for a Second One

No question, 2020 was hell on small businesses. Retail businesses in many areas couldn’t stay open. Employees couldn’t work if they became afflicted with COVID-19 or had increased risk from the virus. Banks were just as scared as everyone else, and finding a small business loan became impossible.

Midway through the year, the Paycheck Protection Program (PPP) was introduced to offer relief to small businesses through SBA small business loans. My company took advantage of the program and kept high-risk employees on the payroll and kept their insurance going, even when they couldn’t come into work.

We applied for and received loan forgiveness on the loan as soon as we were able, and just this week, we got an email from our banker offering us the chance to participate in the second round of PPP loans that's happening now.

Let’s take a look at how you can get your PPP loan forgiven and if you’ll qualify for the second round.

Overview: What is a PPP loan?

PPP loans are intended to help small businesses keep payroll going even during the worst of the pandemic. You must use 60% or more of the loan funds on payroll, and the remainder must be used on crucial expenses such as rent and utilities.

The program runs through the Small Business Administration’s (SBA) existing loan origination process where private banks originate the loans, which are then guaranteed by the government.

The loans are available to small businesses and independent contractors.

How PPP loan forgiveness works

If you did a First Draw PPP loan last year and haven’t had it forgiven yet, now is the time to apply for PPP forgiveness. The longer you wait, the more chance you will owe interest or your loan won’t be forgiven. Here are the PPP forgiveness requirements.

1. Gather information from your accounting software

The SBA requires you to submit specific information for the loan to be fully forgiven. At least 60% of loan funds have to be used on payroll, and the remainder can only be used on mortgage interest, rent, utilities, or uninsured damage from civil unrest.

Most accounting software programs have added special reports you can run to get all the information you need. Look for PPP reports. If you can’t find any, gather the following information for the 24 weeks after you received the loan funds:

• Total labor and burden costs (gather all IRS Form 941s for proof)
• Employee count at loan origination and after 24 weeks
• Total mortgage interest, rent, and utilities expenses for the 24-week period

2. Complete loan forgiveness application

Your bank should be able to help you with the loan forgiveness process. Mine had a software program that integrated with the bank server where I could enter necessary info. If your bank doesn't assist you, check the SBA loan forgiveness website and use the most recent application.

The app shouldn't take long to complete, and if you follow the PPP loan forgiveness rules, the total amount will be forgiven. I took 17 minutes to complete the app, and my bank submitted it to the SBA the same day.

3. Don’t pay taxes on the forgiven amount

The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (say that three times fast), which started the second round of PPP loans, also changed the rules regarding taxation of PPP loan forgiveness.

Traditionally, any loan forgiven must be reported as income on your business’s balance sheet. When the CARES Act was passed last year to start the PPP, the act required any expenses paid by the loan to be left off the income statement or for the loan forgiveness to be reported as income.

The new act allows businesses to report the expenses and reduce taxable income but excludes businesses from having to report the loan forgiveness as income.

I already had a PPP-related headache when renewing a line of credit my business has. I took the PPP loan off the balance sheet on the interim statement when it was forgiven, but originally made the journal entry to debit the loan and credit other income.

Now that we know loan forgiveness won’t be treated as other income, the balance sheet doesn’t balance. That makes the bank nervous. We don’t know exactly how to account for loan forgiveness yet, and you’ll need to lean heavily on your CPA come tax time to make sure you do it all correctly.

Note: if you pay interest on PPP loan funds because you don’t have enough payroll to use it on, you can expense the interest like you would on a normal loan.

3 Second Draw PPP loan requirements

Here are the requirements to get a Second Draw PPP loan.

1. Received a First Draw loan

If you didn't get a First Draw loan, now is the time. The process is the same as it is for Second Draw loans with fewer requirements (you don’t need to prove the drop in sales). The sooner you receive a First Draw loan, the sooner you can have it forgiven and try to get into the Second Draw round.

2. Have no more than 300 employees

The SBA has a convoluted industry-specific way to judge if businesses are small for its normal loans, but it has simplified that to limiting loans to businesses with fewer than 300 employees for the PPP.

3. Had a 25% reduction in sales

Congress wants to make sure that if you participated in the first round, you only participate in the second if you really need to. You can only qualify for the loan if any of your 2020 quarters had total sales of 25% less than the same quarter in 2019.

So if you did $450,000 of sales in Q2 2020 and $600,000 in Q2 2019, you would qualify. Here's the calculation: (($600,000-$450,000)/$600,000 = 25%).

If you haven’t up to now, keep up with the news and bookmark this article to read it again every month or so. I have a feeling the 25% amount will come down at some point. One of my banker contacts told me this week that the majority of his clients had a max sales drop between 17%-22%. If the same is true around the country, Congress will eventually open up the program to more businesses.

This requirement is the same if you’re working for yourself as an independent contractor. Many independent contractors do minimal accounting during the year (just enough to pay estimated taxes) and count on a CPA or bookkeeper to figure everything out at year-end. It’s probably worth your time to figure out exactly how much you did in each of the last eight quarters to qualify if you can.

How to apply for a PPP (Paycheck Protection Program) loan

Getting a PPP loan is easier than a normal loan. Here’s what you should do.

1. Visit your normal banker

If your bank does SBA loans, they probably can help you with a PPP loan. If they can’t, consider switching banks. Your banker, or your bank’s SBA department, should be experts on the program and able to walk you through the process painlessly.

2. Gather documents

The loan amount is based on gross wages you paid to employees in 2019 minus any wages paid to individual employees over $100,000. This is another place where good accounting software will save you a ton of time. If your software has PPP reports, you can simply print those. Otherwise, you’ll need to put together some reports on all your employees’ wages and burden costs from 2019 to use on the application.

3. Use the proceeds on the correct expenses

Follow the PPP loan forgiveness guidelines as much as you can. If you do, the PPP loan is effectively free money for your business with no tax liability.

Don’t delay, apply today

Most business owners dread interacting with the government. You have to report endless items and pay taxes for just about everything. The Paycheck Protection Program is a way you can take advantage of a government program meant to keep your business afloat during volatile times.