Have you ever imagined what you would do with a paycheck protection program loan? Unlike the unemployment benefits that apply only when unemployed, the PPP loan is earmarked for use by employers to cushion employees from being fired due to harsh economic times. The PPP loan can be used for various purposes.
Have you received or plan to apply for a paycheck protection program loan and wonder what course you can direct the money to?
Remember the course you intend to direct the PPP funds to must comply with the terms and conditions set up by the Internal Revenue Service IRS.
This article offers insight into various aspects you can utilize the PPP loan without violating IRS regulations.
Before applying for a paycheck protection program loan, ask yourself whether you meet the following criteria.
- Small businesses with less than 500 employees
- Sole proprietors
- Tribal and veteran groups
- Private non-profit organizations
- Hospitality and restaurants were meeting the 500 member threshold.
- Independent contractors
- Limited liability companies
- S corporations-These are corporations that meet the threshold of being taxed by internal revenue service.
- The business must be based in the United States of America.
Terms for a PPP loan
- The paycheck protection program loan attracts an interest of 1%
- Two to five years repayment period. This is determined by the time the amount was disbursed.
- Neither collateral nor guarantor is required to qualify for the loan.
- No penalty for prepayment
- Payment can be differed till SBA remits forgiveness amount to the lender
- Loan forgiveness should be applied ten months after expiring of the repayment period, failure to which interest applies from the date of disbursement.
Where to apply for a PPP loan
Various financial institutions are approved to issue PPP loans to borrowers in the United States of America. Any federal insured depository firm and any credit institution that has signed an agreement with SBA to approve forgiveness loans to borrowers.
Alternatively, you can consult with your lender on with they have signed an agreement with SBA to offer forgiveness loans. This will help you liaise with the right financial institution in the application process. You can visit the SBA platform to access the list of approved PPP lenders.
The paycheck protection program was designed by the American government to offer incentives to small-scale business enterprises, similar to how some financial institutions offer business loans to minority business owners.
Ideally, the loan focuses on protecting the labor force from the effects of economic meltdown.
IRS regulation requires an employer offered the loan to utilize at least 60% of the amount given in funding payroll expenses. The rest can be directed to other expenses that are not related to financing the cost inquired in paying employees.
Employees laid off during harsh economic times can be rehired using the PPP funds. The main intention of PPP funds is to protect the labor force during harsh economic times.
In this regard, employees who had lost jobs can be rehired using the funds. In other words, you qualify for full forgiveness of the loan should you use the funds to rehire laid-off employees by December 31st, failure to which you will be required to pay back a portion of the funds inquired in payroll expenses.
Payment of insurance premiums
Individuals and entities who qualify for PPP loans can use the proceeds from the loan to pay insurance premiums. The cares act stipulates that PPP loans can be used for Healthcare benefits which are not limited to insurance premiums, medication and sick leave.
Though the regulation doesn’t mention the cost of insurance, the proceeds can be used to fund health-related programs.
Payment of rent
Under the new changes made on legislation regulating the use of PPP funds, borrowers can still get forgiveness even if they utilized the funds to pay rent. In this case, entrepreneurs are allowed to use 60% of the funds on payroll costs, while the rest can be used to meet other expenses.
Business owners can now meet other business-related costs from the remaining amount to keep their business afloat.
Opposed to earlier, where the regulation required employers to spend up to 75 % of the PPP proceeds on funding payroll expenses, the reduction offers room for more funds to be channeled to other needs.
Ideally, even though the funds target to protect employees from losing their jobs, employers have extra expenses they need to incur in business operations.
The amount offered in the paycheck protection program loan can be used to fund mortgage costs. IRS sets regulations governing this criterion indicating that part of the loan can be directed to offset mortgage repayment expenses.
Under this criterion, the IRS regulations indicate that proceeds from the PPP loans should only fund interest accrued in mortgage repayment but not mortgage prepayments.
Mortgage prepayments here refer to inquiring extra costs than the initial agreement in the signed contract.
Payment of Utilities
The ripple effect brought about by COVID 19 has paralyzed business operations in most countries.
Though PPP focuses on funding employees’ salaries, businesses have other extra costs that need to be met.
Ideally, changes done on the law regulating how PPP funds should be spent is a relief to most employers since they can redirect the remaining funds to cater for other expenses.
Financing an SBA EIDL loan
Economic injury disaster loans are grants given to small businesses by the US government to cushion them from harsh economic times. Proceeds from the PPP loan can be used to finance EIDL loans borrowed between January 31st and April 3rd, 2020.
Paycheck protection program is a great program targeting US employees to cushion them from the prevailing harsh economic times caused by the riffle effect of COVID 19. Though applying for the loan might not be difficult, you need help to increase your approval.
PPP loans can be a great opportunity to help your business survive harsh economic times. Prior knowledge about how to spend proceeds from the funds prudently is key in maximizing the value of the loan.