Use of PPP Loan Funds

How can PPP loans be used / What are forgivable expenses?

The proceeds of a PPP loan are to be used for:

  • Payroll costs (as defined in the CARES Act, Economic Aid Act and this interim final rule);
  • costs related to the continuation of group health care, life, disability, vision, or dental benefits during periods of paid sick, medical, or family leave, and group health care, life, disability, vision, or dental insurance premiums;
  • mortgage interest payments (but not mortgage prepayments or principal payments);
  • rent payments;
  • utility payments;
  • interest payments on any other debt obligations that were incurred before February 15, 2020;
  • refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020;
  • covered operations expenditures (payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses);
  • covered property damage costs (costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation);
  • covered supplier costs (expenditures made by a borrower to a supplier of goods for the supply of goods that—
    • are essential to the operations of the borrower at the time at which the expenditure is made; and
    • is made pursuant to a contract, order, or purchase order—
      • in effect at any time before the covered period with respect to the applicable covered loan; or
      • with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan); and
  • covered worker protection expenditures
    • operating or a capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending the date on which the national emergency with respect to the COVID– 19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19;
    • such expenditures may include:
      • the purchase, maintenance, or renovation of assets that create or expand
        • a drive-through window facility;
        • an indoor, outdoor, or combined air or air pressure ventilation or filtration system;
        • a physical barrier such as a sneeze guard;
        • an expansion of additional indoor, outdoor, or combined business space;
        • an onsite or offsite health screening capability; or
        • other assets relating to the compliance with the requirements or guidance as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and
      • the purchase of:
        • covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation;
        • particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or
        • other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor; and
        • such expenditures do not include residential real property or intangible property.

At least 60 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs, the amount of any EIDL refinanced will be included. For purposes of loan forgiveness, however, the borrower will have to document the proceeds used for payroll costs in order to determine the amount of forgiveness.

While the Act provides that PPP loan proceeds may be used for the purposes listed above and for other allowable uses described in section 7(a) of the Small Business Act (15 U.S.C. 636(a)), the Administrator believes that finite appropriations and the structure of the Act warrant a requirement that borrowers use a substantial portion of the loan proceeds for payroll costs, consistent with Congress’ overarching goal of keeping workers paid and employed. This percentage is consistent with the limitation on the forgiveness amount set forth in the Flexibility Act. This limitation on use of the loan funds will help to ensure that the finite appropriations available for these loans are directed toward payroll protection, as each loan that is issued depletes the appropriation, regardless of whether portions of the loan are later forgiven.

How can PPP loans be used by individuals with income from self employment who file a Form 1040, Schedule C?

The proceeds of a PPP loan are to be used for the following:

  • Owner compensation replacement, calculated based on 2019 or 2020 (using the same year that was used to calculate the loan amount) net profit
  • Employee payroll costs (as defined in this interim final rule) for employees whose principal place of residence is in the United States, if you have employees.
  • Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business), business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business), and business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle). You must have claimed or be entitled to claim a deduction for such expenses on your 2019 or 2020 (whichever you used to calculate loan amount) Form 1040 Schedule C for them to be a permissible use. For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 or 2020 Form 1040 Schedule C, you cannot use the proceeds for utilities.
  • Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).
  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (maturity will be reset to PPP’s maturity of two years for PPP loans made before June 5, 2020 unless the borrower and lender mutually agree to extend the maturity of such loans to five years, or PPP’s maturity of five years for PPP loans made on or after June 5).81
  • Covered operations expenditures, as defined in section 7A(a) of the Small Business Act, to the extent they is deductible on Form 1040 Schedule C.
  • Covered property damage costs, as defined in section 7A(a) of the Small Business Act, to the extent they is deductible on Form 1040 Schedule C. viii. Covered supplier costs, as defined in section 7A(a) of the Small Business Act, to the extent they is deductible on Form 1040 Schedule C.
  • Covered worker protection expenditures, as defined in section 7A(a) of the Small The Administrator, in consultation with the Secretary, determined that it is appropriate to limit self-employed individuals’ (who file a Form 1040 Schedule C) use of loan proceeds to those types of allowable uses for which the borrower made expenditures in 2019 or 2020 or that were used on covered property damage, as defined in section 7A(a).

The Administrator has determined that this limitation on self employed individuals who file a Form 1040 Schedule C is consistent with the borrower certification required by the Act; specifically, that the PPP loan is necessary ‘‘to support the ongoing operations’’ of the borrower. The Administrator and the Secretary thus believe that this limitation is consistent with the structure of the Act to maintain existing operations and payroll and not for business expansion. This limitation on the use of PPP loan proceeds will also help to ensure that the finite appropriations available for these loans are directed toward maintaining existing operations and payroll, as each loan that is made depletes the appropriation Business Act, to the extent they is deductible on Form 1040 Schedule C.

Can PPP proceeds be used for lobbying activities or expenditures?

No. None of the proceeds of a PPP loan may be used for (1) lobbying activities, as defined in section 3 of the Lobbying Disclosure Act of 1995 (2 U.S.C. 1602); (2) lobbying expenditures related to a State or local election; or (3) expenditures designed to influence the enactment of legislation, appropriations, regulation, administrative action, or Executive order proposed or pending before Congress or any State government, State legislature, or local legislature or legislative body.

What happens if PPP loan funds are misused?

If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Can I spend less than 60% of my PPP loan on payroll?

Short answer: Yes you can, but you will reduce the amount of your loan that may be forgiven. So you should try to spend at least 60% of your loan on payroll in order to maximize forgiveness.

Long answer: The PPP program has dual purposes: to help protect businesses and jobs. Many of the rules are designed to balance these goals. But there are some areas of conflict or confusion in these rules related to how a business can spend their PPP money and how much of that spending can be forgiven.

Using your loan

There are only two things you can do with your PPP loan: spend it on authorized expenses or pay back the money to your lender. You can’t spend any PPP money on expense categories that aren’t specified as an authorized category.

The SBA’s rules say “At least 60 percent of the PPP loan proceeds shall be used for payroll costs.” This reflects the rule maker’s desire to see businesses deploy PPP loans to protect jobs. However, when applying for their Second Draw loans, borrowers are not required to certify they will spend 60% of their loan proceeds on payroll. The only certification about uses of funds is:

The funds will be used to retain workers and maintain payroll; or make payments for mortgage interest, rent, utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures as specified under the Paycheck Protection Program Rules; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.

Also the SBA has provided an example of what happens if you spend less than 60% of your loan on payroll: you will receive partial forgiveness and have to pay back the non-forgiven portion of your loan.

Getting forgiveness

To maximize the amount of your loan that will be forgiven, you must spend at least 60% of your loan amount on payroll. If you spend less than 60% on payroll you will have to repay a portion of your loan to the lender–clearly a sub-optimal result. This forgiveness formula is listed on the application:

I understand that loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, covered utilities, covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, and not more than 40% of the forgiven amount may be for non-payroll costs. If required, the Applicant will provide to the Lender and/or SBA documentation verifying the number of full-time equivalent employees on the Applicant’s payroll as well as the dollar amounts of eligible expenses for the covered period following this loan.

What happens if I don't spend at least 60% of my PPP loan on payroll?

Short answer: You can receive partial forgiveness according to the forgiveness percentage formula for determining the qualifying amount of forgiveness. Any amount not forgiven will need to be repaid to your lender. You can pay this amount off early or over time (according to other rules). To maximize your forgiveness you should spend at least 60% of your loan on payroll.

Longer answer: Quoting from the SBA: “To receive full loan forgiveness, a borrower must use at least 60 percent of the PPP loan for payroll costs, and not more than 40 percent of the loan forgiveness amount may be attributable to nonpayroll costs. For example, if a borrower uses 59 percent of its PPP loan for payroll costs, it will not receive the full amount of loan forgiveness it might otherwise be eligible to receive. Instead, the borrower will receive partial loan forgiveness, based on the requirement that 60 percent of the forgiveness amount must be attributable to payroll costs.

For example, if a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount). Because the Economic Aid Act changed the loan forgiveness covered period from either an 8- or 24-week period to a covered period between 8 and 24 weeks at the election of the borrower, SBA is eliminating the ‘‘alternative covered period’’ as defined in the interim final rule published at 85 FR 33004, 33006 (June 1, 2020), as amended.

Additionally, an eligible borrower that received a loan of $150,000 or less shall not, at the time of its application for loan forgiveness, be required to submit any application or documentation in addition to the certification and information required by paragraph 7A(l)(1)(A) of the Small Business Act. Such borrowers must retain records relevant to the form that prove compliance with the PPP requirements—with respect to employment records, for the 4-year period following submission of the loan forgiveness application, and with respect to other records, for the 3-year period following submission of the loan forgiveness application. All other borrowers must follow the existing requirements for loan forgiveness applications and records retention. SBA may review and audit PPP loans of $150,000 or less and access any records the borrower is required to retain. All borrowers with loans of any size must provide documentation independently to a lender to satisfy relevant Federal, State, local or other statutory or regulatory requirements or in connection with an SBA loan review.”

Source

Can I use my PPP loan to pay new employees if my old employees want to stay on unemployment?

Yes. To receive forgiveness for your PPP loan, you must spend at least 60% of your funds on payroll costs. This can include hiring new employees, hiring back old employees, or simply maintaining your current staffing levels.

What if my employees are on unemployment and won’t come back after I get a PPP loan?

In order to receive forgiveness for your PPP loan, you are only required to spend at least 60% of your funds on payroll and ensure that you don’t make any reductions in staff after receiving your funds.

You are not required to bring back employees who are on unemployment. You can use your PPP funds to either hire back previous employees, hire new employees, or maintain existing staffing levels.

May First Draw PPP Loan or Second Draw PPP Loan proceeds be used for lobbying activities or expenditures?

No. None of the proceeds of a First Draw PPP Loan or Second Draw PPP Loan may be used for (1) lobbying activities, as defined in section 3 of the Lobbying Disclosure Act of 1995 (2 U.S.C. 1602); (2) lobbying expenditures related to a State or local election; or (3) expenditures designed to influence the enactment of legislation, appropriations, regulation, administrative action, or Executive order proposed or pending before Congress or any State government, State legislature, or local legislature or legislative body.

As of December 27, 2020, is an employer that receives a First Draw PPP Loan or Second Draw PPP Loan also eligible for the Employee Retention Credit?

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. No. 116- 260, 134 Stat. 1182, on December 27, 2020, permits an employer that received a First Draw PPP Loan or Second Draw PPP Loan to claim the Employee Retention Credit if the employer is otherwise an eligible employer satisfying the requirements for the credit. However, payroll costs that are qualified wages for the Employee Retention Credit are not eligible for loan forgiveness if the employer elects to claim the credit for those amounts. (Additional guidance from the IRS is available at https://www.irs.gov/pub/irs-drop/n-21-20.pdf.)

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