The Paycheck Protection Program is designed to help keep you in business during this COVID-19 crisis by offering you a loan, much or all of which you do not have to pay back!
This loan can be used to replace your lost profit and pay for other expenses, including rent, mortgage loan interest, utilities, health insurance premiums, paid sick or medical leave and retirement contributions. If you have employees, it can help you pay to keep your employees working or to recall them if you have laid them off.
This new program allows providers to receive thousands of dollars for eight weeks of eligible expenses. It also offers the opportunity to borrow money for beyond this time period at a very low interest rate. This free money can be invaluable in helping you survive these tough financial times.
Previously I wrote about another SBA loan called the Economic Injury Disaster Loan (EIDL) program that offers up to $10,000 in a forgivable loan for mortgage payments, rent and employee payroll. (A forgivable loan is one you do not have to pay back.)
Determining Your Average Monthly Lost Profit
The first thing to do is determine how much you can borrow to replace your average monthly lost profit. You can actually borrow money to recover up to 2.5 months of your average monthly lost profit, but only eight weeks of it is forgivable. In the examples below, we will only consider that you are asking for a loan for eight weeks your average monthly lost profit. So how do you determine what your average monthly lost profit is?
If you are currently closed and earning no income:
- Calculate your average monthly lost profit by looking at Schedule C, line 31 of your 2019 tax return. That represents your total profit for 2019. Divide this number by twelve. That represents your average monthly profit that you are losing in 2020. If you haven’t filed your 2019 taxes, do the same calculation using your 2018 tax return.
- For example, let’s say you were in business for all of 2019 and your total profit for the year was $36,000. That means your average monthly lost profit in 2020 was $3,000 ($36,000 divided by 12 months).
If you are currently open and earning some income:
- Calculate your average monthly lost profit by adding up your income for the past two months, then subtract your business expenses for the past two months.
- For example, let’s say you earned the same $3,000 per month profit in 2019, but in February, 2020 your earned $2,400 and in March you earned $800 for a total of $3,200. If your business expenses for both months were $2,600, you show a two-month loss of $2,000 ($3,200 – $5,200).
In addition to being able to borrow money for your average monthly lost profit, you can also borrow for other expenses: rent, utilities, mortgage loan interest, health insurance premiums, paid sick or medical leave and retirement contributions. Now let’s say your monthly bills are:
- Utilities: $300
- Utilities are defined as gas, electricity, water, internet, telephone, and transportation. Providers can count their Time-Space Percentage of gas, electricity, water, internet and a second phone line used for their business. Providers can count business trips at $.575 per mile for 2020.
- Mortgage loan interest: $500
- Health insurance premiums for your family: $800
- Total monthly expense: $1,600
Let’s look at two situations. In each situations, let’s say you want to borrow money for eight weeks of average monthly lost profit and other expenses as identified above.
#1 You have no employees
- You are closed and not earning any income
Eight weeks of expenses: $6,000 of lost profit + $3,200 of other expenses = $9,200
To qualify to have the first eight weeks of the loan forgivable, the amount of the other expenses cannot be more than 25% of the total loan amount. In this example $3,200 divided by $9,200 equals 35%. Therefore, to ensure that you have this loan forgiven, you need to reduce your request for other expenses to $2,000. Your new loan request would be for $8,000: $6,000 lost profit plus $2,000 other expenses ($2,000 divided by $8,000 = 25%).
- You are open and are earning some income (or you are closed but still earning some money from parents who continue to pay you)
Eight weeks of expenses: $2,000 of lost profit + $3,200 of other expenses. = $5,200
Again, to qualify to have this loan forgiven the other expenses must not exceed 25% of the total loan request. In this example they are 62% of the total ($3,200 divided by $5,200 = 62%). Therefore, we would have to reduce them to $650, for a total loan request of $2,650 to meet the 25% goal ($650 divided by $2,650 = 25%).
#2 If you do have employees
You can use this PPP program to pay your employees to remain open, or hire back your employees whom you have laid off. Let’s say you pay your one employee $500 a week. Now you want to cover all allowable expenses for eight weeks. This would be:
- $4,000 of wages
- $6,000 of lost profit (if you were closed)
- $3,200 of other expenses
- Total: $13,200
Since your other expenses are less than 25% of the total ($3,200 divided by $13,200 = 24%), all of this amount would be forgiven.
If you borrowed more money to cover a longer period than eight weeks, the amount above $13,200 in this example you would be charged a 1% interest rate.
If you get the loan and then lay off employees during the eight-week period, some of this money will not be eligible for loan forgiveness. Note: The rules regarding paying employees to stay or come back to work get complicated. Talk to your local bank about these rules.
Important Note: If you are not sure how to calculate your average monthly lost profit or average monthly payroll costs for employees, do your best to estimate them and put a number down on the form. Your bank will go through these numbers with you and you can modify them later. Be sure to ask about how much of the loan will be forgiven for the first eight weeks, and how much of the loan you will have to pay back.
You can use the money for purposes other than has been identified above, but that money cannot be forgiven. The loan is at 1% interest and you can borrow up to $100,000. The loan is due in two years and all payments are deferred for six months. You can pay off the loan earlier without penalty. You will not owe any interest on the loan for the first eight weeks. You do not need to make a personal guarantee, no collateral is required and there are no loan fees.
How do I apply for the loan?
The loan application form is a simple two-page form. Here’s the application form for this loan.
- If you are self-employed, check this box at the top of the form. If you are incorporated, don’t check any of the boxes at the top of this form.
- If you have a business name, enter it. If you don’t, enter your own name.
- Enter your Employer Identification Number (EIN), or your Social Security number if you don’t have EIN.
- “Average Monthly Payroll:” Enter your average monthly profit (not gross income), using your 2019 Schedule C, line 31 divided by 12 months. If you haven’t completed your 2019 tax return, use your 2018 tax return. So, if you average monthly profit was $3,000, multiply it by 2.5 and enter $7,500 in the next box. If you have employees, add their average monthly payroll amount to your monthly profit before multiplying by 2.5. Note: Even though you can apply to borrow up to 2.5 months of your average monthly profit (plus wages for employees), you may not want to borrow this full amount. Or, if you do, some if many not be forgivable. Don’t worry about this now. Put down your best estimate. You can make an adjustment later with your banker.
- Number of jobs – Enter 1 if you have no employees, or 1 plus the number of employees.
- Applicant Ownership – Enter your name, title (“owner”), and 100% for Ownership %.
- Check the appropriate boxes for the rest of the first page of the form
- Note that question 4 asks if you have received an SBA Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020. If you answer yes, you are asked to fill out addendum A. But the SBA has not yet released addendum A! Don’t worry about this before submitting this form to your local bank.
- Enter your initials on the lines on the second page of the form and sign it
Once you have completed this form, contact your local bank or credit union. Ask for an appointment with a banker to get a Paycheck Protection Program loan. You can apply for this loan/grant on and after April 10, 2020. Don’t wait until April 10th before making an appointment to talk to a banker. Your loan will be processed by a local bank that has been approved by the SBA. Your local bank may or may not participate in this loan program. You may have to shop around and find another bank or credit union to help you. You must have been in business before February 15, 2020.
Your banker will ask you for your 2019 tax return (or your 2018 tax return if you haven’t completed your 2019 taxes), plus additional information, such as payroll documentation, or a balance sheet before they will process the loan. See my article “What is a Balance Sheet?” It is unknown at this time how long local banks will take to process your loan. The deadline for applying for this loan is June 30, 2020. You can apply forgiveness of the first eight weeks of the loan through your local bank that gave you the loan.
Balance Sheets and Profit/Loss Statements
Your banker may ask you for more than your last tax return. They may ask for a balance sheet or a profit and loss statement. What are these? In short, a balance sheet is a current statement of your assets and liabilities (home much income and business property you own and how much debt you have). A profit and loss statement shows how much income and expenses you have for a month or longer.
I’ve described how to prepare a balance sheet here.
I’ve written about profit and loss statements here along with a template you can use.
Note: Many family child care providers may have never worked with a bank to receive a loan. Applying for a loan may seem intimidating. Although this PPP loan program is intended to distribute money quickly to self-employed business owners, your bank may or may not make this process more difficult. Bring in your spouse or tax professional or friend with you to the bank interview. Don’t get discouraged if you are asked for additional records about your business. This program can give you thousands of dollars of free money. Hang in there.
Although the PPP can seem complicated, it’s still worthwhile applying. I encourage everyone to apply. Congress may pass new laws that will offer additional resources for family child care provider. I will write about them if this happens.
Unemployment Benefits and Subsidy Funding
If you are receiving unemployment benefits will this affect how much of a forgivable loan you can receive? The answer is not clear. It would seem logical that receiving unemployment benefits would reduce, or perhaps eliminate your monthly lost profit. If so, this could mean you would not be eligible for most or all of the forgivable part of this loan but could still receive the 1% interest loan. Also, would receiving the forgivable loan impact your ability to receive unemployment benefits? We don’t know at this time. When the SBA issues guidance on this question, I’ll write about it.
The same issue comes up if you are receiving temporary payments to care for subsidized children who are no longer in your care because you are closed or the family is keeping their child at home. Will these temporary payments affect your ability to get the PPP loan? Since it is reducing or eliminating your monthly lost profit, the answer could be yes. However, since this funding is temporary, it might not make a difference. We don’t know since there has been no guidance issued at this time. I don’t think this should discourage you from proceeding to apply for the PPP forgivable loan.
Questions and Answers
Question: Can I apply for both the PPP and the Economic Injury Disaster Loan (EIDL) program?
Answer: Yes! If you receive the EIDL money it will reduce the amount you can get through the PPP program. This may mean you won’t get any money forgiven for the first eight weeks of the PPP program, but you can still receive the PPP loan amounts beyond the eight weeks that you will pay 1% interest.
Question: Can I borrow money to pay my monthly mortgage payments?
Answer: No, only your monthly mortgage interest.
Question: Can I claim payroll costs if I have hired my husband or my own children?
Answer: Only if you treated them as employees and paid all proper federal and state payroll taxes, including any Social Security/Medicare taxes for your husband and children ages 18 and older.
Question: What if I haven’t filed my 2019 tax return? How do I calculate how much I can borrow?
Answer: Use your 2018 tax return as a guideline and talk to your local bank official.
Question: Can I borrow money to pay an independent contractor?
Question: If I’m an S or C Corporation, can I borrow payroll expenses for myself?
Answer: Only if you have been treated as an employee by paying payroll taxes.
Question: If I get a forgivable loan can I change my rule and not require parents to pay me anything while I’m closed?
Question: Can my employees apply for this forgivable loan?
Answer: No, because they are not a business owner.
Question: Can I use this money to pay for supplies, training, food, a new computer or house repairs?
Answer: Yes, but none of the money for these items would be forgivable and you would owe 1% interest.
Question: When is the loan forgiven?
Answer: After the end of the eight week period, assuming you meet all the requirements of the loan.
Tom Copeland – www.tomcopelandblog.com
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