Speak with a lender and fill out an application to determine exact eligibility. However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the amount for forgiveness. You got your PPP sole proprietor loan? A concept called owner compensation replacement was introduced to help answer that exact question. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: Under the CARES Act, borrowers are eligible for forgiveness of funds spent during the “Covered Period” – the 24 weeks after disbursement, or until the end of the year, whichever is earlier. So, sole proprietors with no employees can have the full amount of the loan paid off. But they must be for spaces … If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. Add the sole proprietor’s 2019 Schedule C line 31 net profit, up to $100,000, to 2019 gross wages paid to employees (up to $100,000 max per employee) ... 2020 (such amounts are not eligible for PPP loan forgiveness). The money is to be spent on … Example. SBA PPP Loan Guidance on Sole Proprietors & Self-Employed Businesses First Southwest Bank • April 14, 2020 The following information is based on our interpretation of the CARES ACT, the SBA Interim Final Rule (and amendments), as well the guidance from the US Treasury in their FAQ’s (as updated). This is capped at $100,000 per employee. You CAN have employees or subcontractors other than yourself. Benchâs monthly reports equip you with what you need for relief applications and beyond. Eligibility requirements for PPP loan forgiveness include: The PPP loan amount was used to cover approved expenses. Remember, if you choose the new the 24 week forgiveness window, 100% of a sole proprietor’s PPP can be forgiven. You do NOT get taxed as an S-Corporation. But you need to meet certain criteria to be eligible for the EZ form. Schedule A worksheet (p 9) 1. Sally is Sole Proprietor with no employees. However, since sole props and contractors usually donât have payroll, their loan is based on 2019 net profit divided by 12, to get a monthly âaverageâ net profit. Schedule C Sole Proprietor – With Employees. As a reminder, only businesses that were operating prior to February 15, 2020 are eligible for a PPP. But the $20,000 isn’t taxable. You operate as a sole proprietorship or a single-member LLC. We created a comprehensive, comprehensible guide all about PPP loan forgiveness for the self-employed, sole proprietors, and independent contractors. They’ll get a $10,000 PPP loan. Borrowers who received loans prior to June 5, 2020, may elect to use the 8-week forgiveness covered period and can claim eight weeks’ worth of OCR. All Rights Reserved. That means the maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. Application instructions (pp 1 & 2) 2. For Accountants. If you are using an 8-week forgiveness period, you can claim 8 weeksâ worth of owner compensation replacement. You must apply for forgiveness within 10 months after the end of the ‘Covered Period.’ which is the 24-week period that starts when you received your PPP loan. Specify the forgiveness amount requested. PPP Loan Forgiveness for the Self-Employed Frequently Asked Questions This calculator estimates forgiveness for self-employed individuals who file Schedule C and have no employees. Sole proprietors and independent contractors are finding the PPP loan especially appealing because of the âowner compensation replacementâ concept that can grant them full forgiveness, letting them use the funds however they want. About 60% of the PPP loan must be used on payroll costs and 40% on non-payroll expenses. But in the real world, there’s not always a separate account…. The forgivable portion is equal to 2.5 months’ worth of their 2019 net profit. However, you will have a $21,000 tax liability (21% corporate rate). Just as PPP loan applications were funneled to the SBA through borrowers’ banks, so are the applications for loan forgiveness, said attorney David Roth of Munsch Hardt Kopf & … Check out a CPAâs guide on using an 8-week or 24-week period. You CAN have employees or subcontractors other than yourself. Your bank might consider forgiveness if you comply with SBA Guidelines. As long as they fit within the categories of utilities, rent, and mortgage interest, home office expenses can be forgiven. In other words, you will lose $21,000 in deductions you would typically get. Take 7 minutes to learn all you need to know about Form 1040 here. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: Bench is an affordable and powerful financial reporting software. The smallest borrowers — namely sole proprietors with no employees and firms that took less than $50,000 — … Exceptional Legal Counsel in Maryland, Virginia, and Washington, D.C. by thatcherlawfirm | Sep 25, 2020 | Firm News |. But the $20,000 isn’t taxable. The PPP limits compensation to an annualized salary of $100,000. Learn more about how we can help you stay informed on your business. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. However, since sole proprietors usually don’t have payroll, their PPP loan is instead based on 2019 net profit as reported on the 2019 Schedule C tax return divided by 12. The 8 week period applicable to forgiveness has been extended to 24 weeks. The reason? In this case, the PPP accounting rules allow the sole proprietor to use all of the $20,000 for “owner compensation replacement.” And in fact, to get forgiveness, the business may need to use the entire PPP loan for that. In this case, the PPP accounting rules allow the sole proprietor to use all of the $20,000 for “owner compensation replacement.” And in fact, to get forgiveness, the business may need to use the entire PPP loan for that. PPP Loan. This is essentially your entire PPP loan, assuming your loan amount did not factor in additional payroll expenses. Below, we’ve provided a summary of the various application options which is intended to help borrowers make the right decision as to which application method to utilize. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. In order to have your loan forgiven, you need to use a certain amount of the loan exclusively for payroll expenses (as a sole proprietor, essentially you are going to use the loan to pay yourself). Based on the new forgiveness application form 3508EZ if you received your PPP loan on or before June 5, 2020, you may choose an 8-week Covered Period or a 24-week Covered Period. Forgiveness Reduction Exemptions; Borrowers of $50,000.00 or less of PPP funds are exempt from any reductions in forgiveness as a result of: Reductions in full-time-equivalent (FTE) employees, and; Reductions to employees’ hourly wage rates and/or annual salaries. We are an online bookkeeping provider powered by real humans. Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete? With independent contractors and self-employed individuals becoming eligible to apply for U.S. Small Business Administration Paycheck Protection Program (PPP) loans Friday, April 10, 2020, the SBA issued an interim final rule on how Schedule C sole proprietors and individual partners in a partnership should treat their self-employment income regarding the PPP loan process. The PPPFA lowers the threshold to … For example, if you receive $15,000 in owner compensation from one business, you will only be able to receive $5,833 compensation from all other businesses you have an ownership stake in. You can review our article on Home Office Deductions and the PPP in just 3 minutes. If you do, then you face very different Payroll Protection Program (PPP) loan forgiveness rules than a sole proprietor or Single Member LLC would face. The SBA has now made it clear that businesses can use a Schedule C filled out for January and February 2020 if the business started after June 30, 2019. You got your PPP sole proprietor loan? For example, if a Sole-Proprietor has the following net-income in 2019, the PPP would be as follows: $80,000 net-income, equates to $16,666 . Now, how do you get that amount forgiven, since you donât have payroll to spend it on? Your email address will not be published. Instead of spending your funds on payroll, you can automatically get 2.5 monthâs worth of net profit forgiven, without having to spend it on anything. Schedule A (p 6) 1. In essence, the PPP loan should be roughly ten weeks’ worth of 2019 net profit. Sign up for a trial of Bench. You will need to prove your expenses for utilities, rent, and mortgage interest. Good bookkeeping is essential if you have a PPP and helps you master your business. As a sole proprietor, your loan is based on your 2019 net profit divided by 12 – this is what gets you to a … For 100% of solo sole props, this means they will have at least some loan remaining in the end. No, the Treasury has indicated that if you filed a Schedule C for 2019, you must use it when applying for the PPP. Why? Her 2019 Schedule C Net Income was $50,000. Her loan forgiveness amount is automatically = $10,417. Get started on a free trial today to learn more. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. We expect the big lenders will set up their own online application process, so you may not need to fill out the SBAâs version of the form. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven. Weâll do one month of your bookkeeping and prepare a set of financial statements for you to keep. Generally, the PPP loan amount that businesses qualify for is based on their average payroll expenses. There is no requirement that this money be spent a particular way, and it is not necessary to document any payroll. The payments made by a sole proprietorship to the owner aren’t tax deductions. Essentially, the business owner has eight weeks to spend the money on specific expenses in order to have it completely forgiven. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Point 3 — Eventual forgiveness of the PPP loan is calculated as follows: 8 weeks worth of 2019 Schedule C income is … (Update: below is what bankers told me; but read the Forbes article I linked to above; it looks like loan forgiveness is automatic on an amount equal to: 2019 net income, divided by 52, times 8.) This is everything we know based on information directly from the SBA, the 19th Interim Final Rule (IFR) filed on June 19th, 2020, and the last update for loans of $50,000 or less released on October 8, 2020. Under the PPP Flexibility Act, you can also calculate your maximum loan based on eight weeks of compensation up to $15,385. As we previously blogged, Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Email me at [email protected]. You received a PPP loan of any type. PPP loans for sole proprietors are determined by the borrower’s owner compensation replacement based on 2019 net profit with an annualized cap of $100,000. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. Owner compensation up to $100k is a legitimate, forgivable expense for sole proprietorship PPP loans and is calculated into the total amount received; you cannot apply for a second/separate PPP loan. And note that a sole proprietor without employees enters zeros in both fields. How Do Sole Proprietors Prove Usage of Funds for PPP Loan Forgiveness? Start a Free Trial. If you have any questions related to the Paycheck Protection Program, or any other aspect of employment law, contact Thatcher Law Firm at 301-441-1400. www.ThatcherLaw.com.
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