Updated on September 27, 2021
This is a contributed article from Samantha Novick, a senior editor at Funding Circle.
PPP Loans in 2021: What Your Small Business Needs to Know
In 2020, the government launched the Paycheck Protection Program (PPP) to give American businesses the capital they needed to survive the COVID-19 pandemic. Unfortunately, data later revealed that most of that PPP loan money went to larger companies, leaving local businesses without essential funding.
The PPP loan program returned in 2021, and this time it was more intentionally structured and targeted to provide relief to local business owners. Small businesses employ more than half of all working Americans, which made this loan program a financial imperative to the entire country's economy.
“[Small businesses are] one of our country’s main economic drivers,” said Awesta Sarkash, government affairs manager at Small Business Majority. "Our main employers are hurting, and so you see a ripple effect.”
On May 31, 2021, the Paycheck Protection Program ended. However, existing borrowers may still be eligible for PPP loan forgiveness.
Below, we'll help walk you through all the changes and nuances you need to know about PPP loans in 2021.
2021 Overview of PPP Loans
Since the program ended earlier this year, small business owners can no longer apply for new rounds of funding. However, small business owners who previously applied and were given funding during the first and second draw can still apply for loan forgiveness.
Not all lenders are participating in PPP loan forgiveness. But, business owners can check the list of participating lenders to see if they’re eligible. If the name of their lender is on the list, those who borrowed can use the online portal of the Small Business Administration (SBA) or fill out SBA Form 3508S to apply.
In addition to PPP loan forgiveness, the SBA is also offering additional COVID-19 relief options, including:
- COVID-19 EIDL
- Shuttered Venues Grant
- Restaurant Revitalization Fund
- SBA debt relief
There’s a chance some small business owners may also qualify for multiple programs. Small business owners that promote vaccinations may be eligible for a tax credit as well.
Nevertheless, we'll walk you through the in-depth forgiveness requirements below.
PPP Loan Forgiveness Criteria
PPP loans have the potential for partial forgiveness, but if you follow the four primary requirements below, you'll be eligible for full forgiveness. Failing any or all of these conditions doesn't deem your loan unforgivable—it'll just decrease your amount of loan forgiveness proportionately.
PPP loan forgiveness has four primary requirements:
- 8- or 24-Week Coverage Period
- 60/40 Rule
- Staffing Maintenance
- Pay Maintenance
8- or 24-Week Coverage Period
You'll need to spend your PPP money during the 8- or 24-week coverage period you agreed to in your loan terms. Your coverage period starts on the day you receive your PPP loan disbursement—not the day you begin your application or sign the loan agreement.
Expenses made outside of this coverage window won't be eligible for forgiveness.
60/40 Rule
Your business needs to spend at least 60% of your PPP funds on payroll costs (this was originally 75%). You can spend the remaining 40% on the other eligible expenses mentioned above, but costs that exceed 40% won't qualify for forgiveness.
Staffing Maintenance
PPP loans are intended to keep small businesses operating and citizens employed. If you've let employees go due to financial restraints caused by COVID-19, then you'll need to rehire (or attempt to rehire) them before applying for loan forgiveness.
PPP loans in 2021 don't have an explicit rehiring grace period, but it's generally understood to be during your covered period. Take care of any rehirings during this window to ensure your forgiveness eligibility.
If an employee who's been let go doesn't wish to be rehired, you can exclude them from your calculations with the following qualifications:
- You must have made a written offer to rehire the employee in good faith
- You must have offered to rehire the employee with the same hours, wages, or salary that they had before you laid them off
- You must have documentation of the employee's rehiring rejection
If you fired your employee for cause or they chose to resign (or significantly reduce hours) voluntarily, you could also qualify for an exemption.
Pay Maintenance
If you've reduced employee hours or pay, you'll need to raise them to at least 75% of your employee's pre-COVID salary. Any disparities between your employees' current pay and the 75% threshold will reduce your eligible forgiveness.
There's no specific deadline for when you have to apply for PPP loan forgiveness. However, PPP loans have 10-months of deferred payments, meaning you'll have to start making loan payments once your deferred period is up.
It's a good idea to apply for forgiveness as soon as possible to avoid any hiccups or delays.
Ways You Can Use Your PPP Loan in 2021
Originally, PPP loans could only be used on payroll costs, utilities, rent, and mortgage interest payments. In the second round, the SBA expanded coverage to include other necessary business expenses.
Here is the full list of eligible expenses where you can spend your PPP loan funds:
- Payroll: Salary, wages, commissions, bonuses, tips, leave (including vacation, parental, family, medical, and sick), and group insurance benefits (life, dental, vision, and disability)
- Rent: Payments for any rented buildings, vehicles, or equipment leased before February 15, 2020
- Interest payments: Interest payments on mortgage obligations initiated before February 15, 2020
- Utility payments: Water, gas, electricity, transportation, telephone, and internet service payments for contracts made before February 15, 2020
- Supplier costs: Costs to pay suppliers for any expenses made before obtaining a PPP loan that are essential for ongoing operations
- Operations expenditures: Software, human resources, accounting, and cloud-computing payments
- Worker protection expenditures: Payments to purchase protective equipment and work adaptations to help your business follow updated federal health and safety guidelines
- Property damage costs: Costs for repairs necessary to fix damages incurred from public disturbances in 2020 that your insurance didn't cover
PPP Loans and Your Taxes
The second stimulus bill makes it clear that PPP loans will not impact your tax obligations.
Generally, government grants are considered business income, and therefore taxable. However, the government has made PPP loans tax-free, meaning you don't need to report your forgivable portion as taxable income.
“Doing your taxes wasn’t easy before COVID,” says Keith Hall, president and CEO of the National Association for the Self-Employed. “The good news is this year isn’t going to be any harder than tax returns you’ve had in the past. If it is forgiven, it will not be taxable income. Period."
Plus, you can still claim tax deductions on expenses you used your PPP loan to cover. This creates two layers of tax benefits for your business.
"The first benefit is making the loan income-tax-free,” says Roshani Pandey, financial advisor and founder of True Root Financial in San Francisco. “The second is allowing businesses to claim income deductions on expenses paid.”
However, you can't use your PPP loan to cover any of your existing business taxes. Any portion of your loan spent on this won't be forgivable.
How Did PPP Loans Work?
The government allocated $284.5 billion to the second round of PPP funding. The Small Business Administration didn’t actually provide the funding to businesses—it just guaranteed a large portion of the loans.
SBA-approved lenders administered the loans, and they were more incentivized to lend to small business owners (even riskier ones) thanks to the government's guarantee.
PPP loans aren't your normal-every-day loans, though. When used appropriately, these loans have the potential for 100% forgiveness. As stated, this means if you use the funds correctly, the government will now turn your loan into a tax-free government grant—essentially making it free capital for your business.
Businesses were able to earn a PPP loan that was equal to 2.5 times their average monthly payroll costs. First-time drawers had a $10 million loan maximum, while second-time drawers could have borrowed up to $2 million.
Small Business Qualification for a PPP Loan
PPP 2.0 loans had different criteria than the original 2020 PPP loans. The second round of funding that opened in early 2021 was intended for three types of businesses:
- Qualified businesses that didn't receive a PPP loan in 2020
- Businesses that received a PPP loan and needed a second loan (while meeting certain criteria)
- Businesses that received a PPP loan but returned all or part of their original loan
There were a few different PPP loan qualifications 2021 depending on if you were a first-time or second-time PPP borrower.
First-Time Borrower Requirements
- Your business must have been operational since at least February 15, 2020
- Your business had to be open and operating
- You needed to have 500 or fewer employees (if your business has multiple locations, you needed 500 or fewer employees per location)
- Proof that PPP funding was necessary to sustain your business through past economic issues
Second-Time Borrower Requirements
- You used (or had plans to use) the entirety of your first PPP loan or returned the remainder
- Your business showed a 25% or greater reduction in revenue
- Your business must have been operational since at least February 15, 2020
- Your business had to be open and operating
- Your business needed to have less than 300 employees (if your business has multiple locations, you needed 300 or fewer employees per location)
PPP loans had the same terms and conditions for both first-time and second-time borrowers:
- Full-forgiveness potential
- 1% interest rate on non-forgivable amounts
- ~5-year terms
- No application fees
- No collateral or guarantees
- Deferred loan payments
Apply for PPP Loan Forgiveness Before It’s Too Late
As a small business owner, you can receive loan forgiveness if you received PPP funding during the first or second wave of loans. As such, it’s important that you review the requirements and gather the appropriate documentation in advance to avoid any hang-ups during the application process.
Once your application is submitted, your lender will notify you of the forgiveness amount they’ve granted your business. Borrowers who need assistance can contact the SBA directly through their call center.
Sources:
SBA. PPP Loan Forgiveness. https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-loan-forgiveness
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