Cameron Miranda
The COVID-19 pandemic caused economic devastation, leading Congress to create the Paycheck Protection Program (PPP) as part of the CARES Act. The PPP provides extremely low-cost loans, which are forgivable if a qualifying applicant spends the money on payroll and other qualifying expenses. PPP2, the second round of the program, was approved by Congress and allowed borrowers to select their own covered period. Law firms could apply for PPP loans through their FDIC-insured bank, and the Small Business Administration (SBA) compensated lenders for processing these loans. The SBA also provided a list of approved lenders on its website, and applicants could also search for lenders on third-party websites.
| Characteristics | Values |
|---|---|
| Loan type | Low-cost |
| Application fee | Free |
| Application deadline | 31 May 2021 |
| Repayment interest rate | 1% |
| Repayment maturity | 5 years |
| Minimum amount to be spent on payroll costs | 60% |
| Maximum loan amount | 2.5 times the average monthly costs |
| Maximum employee compensation included in calculation | $100,000 |
| Applicant type | Small business, sole proprietor, independent contractor, self-employed person, 501(c)(3) nonprofit organization, 501(c)(19) veterans organization, tribal business |
| Applicant location | United States or its possessions |
| Applicant net worth | Less than $15 million as of 27 March 2020 |
| Applicant average net income | Less than $5 million for the two fiscal years prior to the application date |
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What You'll Learn
PPP2 for law firms
In late December 2020, Congress approved a second round of the Paycheck Protection Program (PPP), or PPP2, as part of the Consolidated Appropriations Act, 2021. This $900 billion aid package included funding for small businesses still struggling amid the COVID-19 pandemic.
To be eligible for a Second Draw PPP loan, law firms must have experienced a revenue reduction of at least 25% in 2020 compared to 2019. This can be calculated by comparing one quarter in 2019 to the same quarter in 2020 or by looking at the entire calendar year. For example, if a firm's gross revenue in the second quarter of 2019 was $500,000, it should be less than $375,000 in the second quarter of 2020 to qualify.
The amount of the loan is calculated as 2.5 times the average monthly costs, with payroll costs being a critical factor. Average monthly payroll costs are determined using the 12 months prior to the loan, either from 2019 or 2020, excluding payroll costs above $100,000 for any employee. At least 60% of the loan proceeds must be spent on qualifying payroll costs.
The PPP2 loan application process for law firms is similar to the first PPP loan. The same documentation is required to substantiate payroll costs, and employee and compensation levels must be maintained as with the First Draw PPP loan. If the loan is not forgiven, it carries a 1% interest rate, a 5-year maturity, and payment deferral options.
Unique Terms of PPP2
While the 8-week covered period of the first PPP may have disadvantaged some law firms due to their compensation models, the 24-week period was administratively burdensome for many. With PPP2, borrowers can select a covered period between 8 and 24 weeks from the loan origination date. Additionally, the CAA has expanded the list of qualifying expenses for loan forgiveness, including property damage, adapting offices to enhanced safety standards, purchasing PPE, and "covered operations expenditures."
The deadline for applying for a PPP loan was March 31, 2021. While PPP loans do not carry tax implications, it is important to consult a tax advisor to discuss loan forgiveness and explore other tax credits, such as the employee retention credit under the CARES Act, to minimize the firm's overall tax burden.
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PPP loan forgiveness
The Paycheck Protection Program (PPP) was one of the most significant aspects of the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The PPP, administered by the Small Business Administration (SBA), authorized $349 billion in federally guaranteed loans to small businesses and self-employed individuals adversely affected by the COVID-19 pandemic. These loans were designed to be essentially tax-free grants to pay for payroll and other immediate needs within certain parameters defined by the SBA and the US Department of the Treasury.
Borrowers may be eligible for PPP loan forgiveness. To apply for forgiveness, borrowers can use the SBA's direct forgiveness portal, which takes around 15 minutes to complete, or they can work with their lender, who can accept PPP forgiveness applications directly. Each forgiveness form has unique instructions for documentation that must be submitted with the loan forgiveness application. For example, borrowers must provide documentation for all payroll periods that overlapped with the covered period, including bank account statements and tax forms.
It's important to note that PPP loan forgiveness may come with a surprise bill for some government contractors, particularly those with cost-reimbursable contracts subject to Federal Acquisition Regulation (FAR) 31.201-5. The Defense Contract Audit Agency (DCAA) considers PPP loan forgiveness within this cost principle, and it must be disclosed as a credit. This means that the government could effectively be paying twice for the same costs.
When considering PPP loan forgiveness, it is recommended that businesses consult their tax and financial advisors to determine the best strategy for their specific situation. Some businesses may benefit from applying for loan forgiveness as soon as they have spent the funds, while others may prefer to wait for further clarification on forgiveness from their lender, the SBA, or Congress.
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PPP loan eligibility
The Paycheck Protection Program (PPP) was first introduced during the COVID-19 pandemic to provide economic relief to small businesses. Congress approved a second round of funding, PPP2, which expanded the list of qualifying expenses that could result in loan forgiveness. Law firms could apply for PPP loans before the deadline of March 31, 2021.
To be eligible for a PPP loan, law firms had to meet specific criteria. Firstly, the average monthly payroll costs were calculated using the 12 months prior to the loan for either 2019 or 2020. Payroll costs above $100,000 for any individual employee on a prorated, monthly basis were excluded from this calculation. The loan amount was determined using a formula: 2.5 times the average monthly costs.
Additionally, PPP2 required borrowers to allocate at least 60% of the loan proceeds to payroll costs. However, the covered period for this requirement could be selected by the borrower, ranging from 8 to 24 weeks from the loan origination date. This flexibility allowed borrowers to manage their administrative burden and avoid long-term outstanding debt.
Other qualifying expenses for PPP loan forgiveness included property damage coverage, expenditures for adapting offices to enhanced safety standards, purchasing PPE, and "covered operations expenditures." Law firms that did not receive PPP loans could consider applying for the employee retention credit under the CARES Act, which offered a payroll tax credit of up to $5,000 per employee for eligible businesses.
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PPP loan lenders
The Paycheck Protection Program (PPP) was designed to help businesses stay afloat during the pandemic. The Small Business Administration (SBA) offers PPP loans, and businesses can apply for PPP loan forgiveness.
PPP loan fraud has been an issue, with scammers stealing over $100 billion in PPP loans. Fintech lenders had the highest rate of suspicious PPP loans, accounting for around half of all suspicious loans despite only making up 29% of PPP loans.
PPP loan forgiveness applications must be submitted within 10 months of the last day of the covered period. Applications can be submitted through the SBA's direct forgiveness portal or directly through a lender. The SBA provides forms and instructions for the forgiveness application process, which require additional documentation to be submitted.
Lenders can still accept PPP forgiveness applications directly. Lenders can provide information about the progress of the forgiveness application if the application was submitted through them.
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PPP loan application process
The PPP loan application process can be daunting, but there are many favourable funding options available. Law firms should first consider whether they qualify for the employee retention credit under the Coronavirus Aid, Relief and Economic Security (CARES) Act. This is a payroll tax credit of up to $5,000 per employee for employers that had to suspend operations due to COVID-19-related government orders or experienced a significant decline in gross receipts.
The formula for calculating the amount of the loan is 2.5 times the average monthly costs. Average monthly payroll costs can be calculated using the 12 months prior to the loan for either the 2019 or 2020 calendar year. Payroll costs above $100,000 for any one employee must be excluded. At least 60% of the proceeds must be spent on qualifying payroll costs.
The CARES Act fixed a Congressional oversight, and QIP is now back to being classified as having a 15-year depreciation period (rather than 39). These changes apply retroactively to property acquired and placed in service after December 31, 2017. Therefore, in addition to addressing this for your 2020 taxes, you may also want to amend your 2018 and 2019 taxes.
When applying for a PPP loan, it is important to have all tax and payroll documents in order. Each application must be filled out precisely as instructed, with an approved digital signature. It is also a good idea to speak with a tax advisor beforehand, to discuss the best PPP loan forgiveness strategy for your business. Some businesses should apply for loan forgiveness as soon as they’ve spent the funds, while others may benefit from waiting for further clarification.
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Frequently asked questions
Yes, law firms can apply for the Paycheck Protection Program (PPP). PPP provides extremely low-cost loans to qualifying small businesses.
You can apply for a PPP loan through your FDIC-insured bank or a lender listed on the Small Business Administration (SBA) website. Applying for a PPP loan is free.
The loan amount is calculated using the formula: 2.5 times your average monthly costs.
The last day to apply for a PPP loan was May 31, 2021.
Yes, PPP loans can be forgiven if the loan proceeds are spent on qualifying expenses, such as payroll, property damage, and safety enhancements.
