January 21, 2021

First Draw PPP Loan Amount Calculations

Over the past few weeks, the Paycheck Protection Program (PPP) has undergone significant changes as outlined in the Consolidated Appropriations Act, 2021. The Small Business Administration (SBA) has made several updates including the introduction of SBA Form 3508S, forgiveness application for loans less than $150,000 and updated both SBA Form 3508 and Form 3508EZ. In addition, Procedural Guidance was also issued outlining how PPP borrowers can apply for loan increases. For Atlanta businesses considering a first time PPP loan, the SBA released guidance on how to calculate loan maximums and required documentation. The guidance provides important information to review prior to applying because the calculation formula and documentation requirements vary based on the entity type. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key information below.

Partnerships

Applicants that are partnerships (excluding individual partners as they are ineligible for separate PPP loans) should use the following calculation to determine the maximum loan amount. It is important to note that all borrowers can calculate the maximum loan amount using information from either 2019 or 2020. The information below uses 2019 for illustration purposes.

1. Determine total 2019 payroll costs by identifying the 2019 Schedule K-1, net earnings from self-employment of U.S. based general partners that are subject to self-employment tax, multiplied by .9235, up to $100,000 per partner. Then add it to the 2019 gross wages and tips paid up to $100,000 per employee.
2. Determine the average monthly payroll cost by dividing the total from step 1 by 12 (the total number of months in a year).
3. Multiply the average monthly payroll cost by 2.5.
4. Add the outstanding amounts of any Economic Injury Disaster Loans (EIDL) made between January 31, 2020, and April 2, 2020, that will be refinanced. Also, do not include any amount received from an EIDL advance because they do not have to be repaid.

Required Documentation

At the time of application, the partnership’s 2019 IRS Form 1065 (including K-1s) should be included to substantiate the loan amount. If there are employees, then other relevant documentation such as IRS Form 941 for each quarter, along with records of contributions for retirement, group health, life, disability, vision, and dental insurance. Finally, a payroll statement from the period that covers February 15, 2020, to establish the business was in operation on that date.

S-Corporations & C-Corporations

Applicants who are C-Corporations or S-Corporations should use the following formula to calculate the maximum loan amount that can be borrowed.

1. Determine payroll costs by adding gross wages and tips paid up to $100,000 per employee, the amount indicated on Form 941 for taxable Medicare wages and tips for each quarter, and any pre-tax health insurance or other fringe benefit contributions. Remember to subtract any amounts paid that exceed $100,000. Also include employer insurance contributions, retirement contributions, and state and local taxes assessed on employee compensation.
2. Determine the average monthly payroll cost by dividing the total from step 1 by 12 (the total number of months in a year).
3. Multiply the average monthly payroll cost by 2.5.
4. Add the outstanding amounts of any Economic Injury Disaster Loans (EIDL) made between January 31, 2020, and April 2, 2020, that will be refinanced. Do not include any amount received from an EIDL advance because they do not have to be repaid.

Required Documentation

At the time of application, the business must submit a copy of the IRS Form 941 for each quarter in 2019, copies of the tax return (Form 1120 or 1120-S) and proof of any retirement, group health, life, disability, vision, and dental insurance contributions made. Finally, a payroll statement from the period that covers February 15, 2020, to establish the business was in operation on that date.

Self-Employed with No Employees

Applicants who are self-employed without employees, independent contractors, and sole proprietors should use the following formula to calculate the maximum loan amount that can be borrowed.

1. Find the net profit amount by looking at the 2019 IRS Form 1040, Schedule C, online 31 (net profit). If the amount exceeds $100,000 then it will be necessary to reduce it to this amount for calculation purposes. If the amount is zero, or less, then a potential applicant is ineligible.
2. Determine the average monthly net profit by dividing the 2019 net profit by 12 (the number of months in a year).
3. Multiply the average monthly net profit by 2.5.
4. Remember to add the outstanding amounts of any Economic Injury Disaster Loans (EIDL) made between January 31, 2020, and April 2, 2020, that will be refinanced. Do not include any amount received from an EIDL advance because they do not have to be repaid.

Required Documentation

There are several types of documentation that must be submitted along with the application. This includes the 2019 IRS Form 1040 Schedule C, 1099-MISC detailing non-employee compensation received, IRS Form 1099-K, invoices, bank statements, or book of records establishing the applicant was in operation on February 15, 2020.

Limited Liability Companies (LLCs)

These companies should follow the guidance that corresponds to the elected tax filing status based on the selected reference period used to calculate payroll costs (2019 or 2020). For example, for LLCs that file as a partnership, the rules for these applicants should be followed.

Contact Us

The renewed Paycheck Protection Program (PPP1) provides an important option for Atlanta businesses that did not previously receive a loan. Although the application is short in length there are several complex calculations that need to be made. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.