ppp loan forgiveness sole proprietor

All Rights Reserved. Share this article. Eligibility requirements for PPP loan forgiveness include: The PPP loan amount was used to cover approved expenses. You got your PPP sole proprietor loan? in order to have their entire loan forgiven. Our 4 minute guide about Owner Compensation Replacement breaks down some common questions about using it, including if it’s compatible with PUA (spoiler alert—it’s not). If you correctly calculated the original PPP loan amount and spent those funds on forgivable costs, you should get full forgiveness. The PPP loan has a two-year maturity timeline with a 1% interest rate. Forgiveness applications are not being accepted or processed just yet. Bench is an affordable and powerful financial reporting software. That means that the maximum possible loan amount is $20,833, and this entire amount can be used as personal income replacement. Schedule A (p 6) 1. Point 3 — Eventual forgiveness of the PPP loan is calculated as follows: 8 weeks worth of 2019 Schedule C income is … You CAN have employees or subcontractors other than yourself. Take 7 minutes to learn all you need to know about Form 1040 here. Most sole proprietors and independent contractors will likely get their loans forgiven based on the changes made by the PPP Flexibility Act and subsequent SBA rulings. Phone: 301-850-1246 Toll Free:  866-604-3882 Fax: 301-441-9602. 1 (888) 760 1940. Take 7 minutes to learn all you need to know about Form 1040 here. The best part? The loan amount is $100,000 divided by 12 x 2.5 = $20,833. These FAQs are for informational purposes only, are general in nature, and should not be relied upon or construed as a legal opinion or legal advice. Now the forgiveness comes in. Schedule A worksheet (p 9) 1. The 8 week period applicable to forgiveness has been extended to 24 weeks. Your bank might consider forgiveness if you comply with SBA Guidelines. We created a comprehensive, comprehensible guide all about PPP loan forgiveness for the self-employed, sole proprietors, and independent contractors. This number times 2.5 equals your PPP loan amount. When it comes time to apply for forgiveness, sole proprietors can claim “Owner Compensation Replacement,” which allows them to automatically claim a portion of their PPP loan as lost profit. (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.) Her 2019 Schedule C Net Income was $50,000. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is therefore $20,833, and the entire amount is automatically eligible for forgiveness as owner compensation replacement. The payments made by a sole proprietorship to the owner aren’t tax deductions. How it Works. 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. As long as they fit within the categories of utilities, rent, and mortgage interest, home office expenses can be forgiven. The PPP loan forgiveness application process has recently experienced various changes, and there are several forms and requirements associated with the different methods of applying for forgiveness. 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. No. Check out a CPA’s guide on using an 8-week or 24-week period. Here's how self-employed folks will fill out the PPP Forgiveness Application form—this applies to sole proprietors, independent contractors, and partnerships without employees. If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of owner compensation replacement. This is essentially your entire PPP loan, assuming your loan amount did not factor in additional payroll expenses. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven. To qualify for forgiveness as an independent contractor or sole proprietor, you must spend your full loan on compensation, such as wages, income, commissions or net earnings. In essence, the PPP loan should be roughly ten weeks’ worth of 2019 net profit. As a reminder, only businesses that were operating prior to February 15, 2020 are eligible for a PPP. 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. Loan details As with any loan, it’s important to understand the terms. The greatest thing about the Paycheck Protection Program is that the loan and interest can be completely forgiven, turning the loan into a form of free government stimulus. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. As we previously blogged, Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This is important as now 100% of the PPP loan given to a sole proprietor with no other payroll can be forgiven! 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. 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). a CPA’s guide on how the PPP and other relief programs will affect your 2020 taxes. You received a PPP loan of any type. If you do have payroll expenses, then you can use the standard forgiveness application. Schedule A instructions (p 5) 3. Good bookkeeping is essential if you have a PPP and helps you master your business. Instead of spending your funds on payroll, you can automatically get 2.5 month’s worth of net profit forgiven, without having to spend it on anything. Applying for PPP Loan Forgiveness •Forgiveness Forms -11 pages •Breaks into five pieces; 1 and 2 must be submitted to Lender: 1. Remember, a sole member LLC files a Schedule C, so they are included here as well. 1B. 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). For self-emplyoed individuals that have multiple businesses with PPP loans, you are capped at $20,833 in owner compensation replacement across all loans obtained by all businesses. Sole proprietor and independent contractor requirements. You got your PPP sole proprietor loan? 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 might be eligible for PPP full loan forgiveness if they: Used 60% or more of the loan to cover payroll (or, in the case of sole proprietors, net profit) Used no more than 40% on qualifying expenses, like mortgage interest, rent, or utilities. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. So, sole proprietors with no employees can have the full amount of the loan paid off. The PPP limits compensation to an annualized salary of $100,000. Whenever you’re talking taxes, reading about taxes, planning to reduce your business taxes, you first need to know how the … However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the amount for forgiveness. 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. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is therefore $20,833, and the entire amount is automatically eligible for forgiveness as owner compensation replacement. Sole proprietors and independent contractors are finding the PPP loan especially appealing because of the “owner compensation replacement” concept that can grant them full forgiveness, letting them use the funds however they want. The Top (Lesser Known) COVID-19 Small Business Relief Resources, A Guide to SBA 7(a) Loans for Small Businesses. Submitting Form 3508S Forgiveness Application To receive forgiveness, a borrower submits the completed 3508S loan forgiveness application (or an online equivalent) and any required documentation to the PPP lender. The forgivable portion is equal to 2.5 months’ worth of their 2019 net profit. Let’s look at the calculation. Your bank might consider forgiveness if you comply with SBA Guidelines. You received a PPP loan of any type. Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. But you need to meet certain criteria to be eligible for the EZ form. But they must be for spaces … Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. However, since sole props and contractors usually don’t have payroll, their loan is based on 2019 net profit divided by 12, to get a monthly “average” net profit. They’ll get a $10,000 PPP loan. If you don’t have any eligible business expenses you can use the PPP funds for, the remaining balance of the loan will need to be repaid according to the PPP loan terms. 2019 Net Sched C (Line 31) = $85,000. 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. Now, how do you get that amount forgiven, since you don’t have payroll to spend it on? 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. Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. Forgivable Loan Request $17,708 ($85,000 ÷ 12 * 2.5) Your bank might consider forgiveness if you comply with SBA Guidelines. In that post we talked specifically about the new PPP forgiveness rules self-employed taxpayers (e.g., sole proprietors, … Exceptional Legal Counsel in Maryland, Virginia, and Washington, D.C. by thatcherlawfirm | Sep 25, 2020 | Firm News |. That means the maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. Your personal bookkeeper will be there to walk you through everything so there’s zero learning curve. Let’s say a sole proprietor has 2019 net income of $48,000. About 60% of the PPP loan must be used on payroll costs and 40% on non-payroll expenses. Her loan forgiveness amount is automatically = $10,417. Using the OCR, sole proprietors can claim forgiveness based upon 2019 net profit. Application instructions (pp 1 & 2) 2. You do NOT receive a W-2 paycheck from your business. PPP Loan Forgiveness for Sole Proprietors: 100% for Salary? This applies to PPP loans using a 24-week covered period. Required fields are marked * Name * Email * Your Review. It really is best if this is a separate business account! These are advertised as being “fully forgivable.” But here’s where the “gotchas” set in. Reply. Example. Generally, eligible expenses your business pays can be claimed as tax deductions. Schedule C Sole Proprietor – With Employees. Her loan forgiveness amount is automatically = $10,417. Let’s say a sole proprietor has 2019 net income of $48,000. If for some reason your loan is not forgiven, you can repay it based on the latest PPP loan terms. Sole proprietor and independent contractor requirements. For 100% of solo sole props, this means they will have at least some loan remaining in the end. The money is to be spent on … Remember, if you choose the new the 24 week forgiveness window, 100% of a sole proprietor’s PPP can be forgiven. 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 . Generally, the PPP loan amount that businesses qualify for is based on their average payroll expenses. Bench’s monthly reports equip you with what you need for relief applications and beyond. This example happens to be the maximum loan amount any sole proprietor will be eligible for. Originally, forgiveness of the PPP loan was possible if recipients of the loan spent at least 75% of the loan on payroll expenses within 8 weeks of receiving the loan. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. PPP loan forgiveness requirements. For instance, if your business is a C corporation, that borrowed $100,000 in a PPP loan, and you used the funds on expenses that qualify for PPP loan forgiveness, that amount won’t be included as taxable income at the end of the year. It is not necessary to document any payroll. Education. © 2020 Thatcher Law Firm. Your email address will not be published. Sally is Sole Proprietor with no employees. Leave a Reply Cancel reply. The minimum 75% rule spent towards payroll costs to be eligible for full forgiveness has been decreased to 60%. Answer: Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan … Your bank might consider forgiveness if you comply with SBA Guidelines. If the borrower obtained an EIDL advance, provide the amount and the EIDL application number. 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. Because ABC Cookies is a Schedule C Sole Proprietorship and can check Box 1 on Form 3508EZ Instructions, it … Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. However, if a sole proprietor’s loan took other expenses into account and they are unable to have 100% of their loan forgiven as Owner Compensation Replacement, they would still need to spend the remainder of their loan on approved purposes (e.g., rent, utilities, mortgage interest, etc.) The PPPFA lowers the threshold to … However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. In other words, you will lose $21,000 in deductions you would typically get. Which means your PPP loan is roughly ten weeks worth of net profit. Your owner compensation replacement value is two and a half months of your net income as reported on your 2019 Schedule C, with an annualized cap of $100,000. The amount of Owner Compensation Replacement you’re eligible to claim for forgiveness is calculated by multiplying your reported net income in 2019 on your Schedule C by 2.5/12 (or 0.208). Note: For an independent contractor or sole proprietor, you must have claimed or be entitled to claim a deduction for these expenses on your 2019 Form 1040 Schedule C in order to claim them as expenses eligible for PPP loan forgiveness in 2020. And note that a sole proprietor without employees enters zeros in both fields. PPP Loan Forgiveness Application for Small Businesses. Out of that account, you will “pay” yourself by writing a check to yourself, or initiating a transfer between the busine… You do NOT receive a W-2 paycheck from your business. Sign up for a trial of Bench. Our free PPP checklist can make staying on top of forgiveness a breeze. This $669 billion-dollar loan program was designed to help businesses negatively affected by COVID-19 continue to pay their employees. Resources . For Accountants. 4. If you received your loan after June 5, 2020, you apply based on the 24-week period. But the $20,000 isn’t taxable. 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. When Can I Submit My PPP Forgiveness Application? You got your PPP sole proprietor loan? SBA and your lender will take the advance amount into account when determining forgiveness of your PPP loan, reducing your forgiveness dollar-for-dollar by the value of your EIDL advance. Continue with your ongoing bookkeeping and recordkeeping habits. This is capped at $100,000 per employee. If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. Bench assumes no liability for actions taken in reliance upon the information contained herein. No, the Treasury has indicated that if you filed a Schedule C for 2019, you must use it when applying for the PPP. Sally is Sole Proprietor with no employees. All or part of the PPP loan you receive can be forgiven if you keep your fulltime employees or rehire them within 24 weeks of receiving the loan or by December 31, 2020. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. There is no requirement that this money be spent a particular way, and it is not necessary to document any payroll. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. Here is an oversimplified summary of how PPP loans work for sole proprietors and freelancers without employees: Point 1 — The loan is based on 2019 Schedule C income: In fact, a copy of the 2019 Schedule C tax form must be included with the PPP loan app, even if the applicant hasn’t filed their 2019 tax return yet. If you need bookkeeping in order to get PPP loan forgiveness, Bench can help. Essentially, the business owner has eight weeks to spend the money on specific expenses in order to have it completely forgiven. You operate as a sole proprietorship or a single-member LLC. 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). Email me at [email protected]. You CAN have employees or subcontractors other than yourself. Are you an independent contractor or sole proprietor with no employees and curious WHY you have to fill out the crazy-long PPP forgiveness application? One of them—Form 3508EZ—is much shorter and simpler than the other. You do NOT get taxed as an S-Corporation. You can review our article on Home Office Deductions and the PPP in just 3 minutes. You can count rent, mortgage interest and utility payments toward forgiveness as well. Schedule A worksheet instructions (pp 7-8) 4. 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. Note: For an independent contractor or sole proprietor, you must have claimed or be entitled to claim a deduction for these expenses on your 2019 Form 1040 Schedule C in order to claim them as expenses eligible for PPP loan forgiveness in 2020. UDPATE: Not so fast on this. 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. At 1% interest for 5 years, it’s one of the best loan terms you can find, but there is no prepayment penalty if you wish to pay it all off early. Under the PPP Flexibility Act, you can also calculate your maximum loan based on eight weeks of compensation up to $15,385. Sole proprietors might be eligible for PPP full loan forgiveness if they: Used 60% or more of the loan to cover payroll (or, in the case of sole proprietors, net profit) Used no more than 40% on qualifying expenses, like mortgage interest, rent, or utilities. As a sole proprietor, 1099 contractor, single-member LLC, or a gig economy member, you may be eligible for a PPP loan. Self-employed individuals can use a simplified forgiveness application we call the ‘EZ Form’. 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. You will need to prove your expenses for utilities, rent, and mortgage interest. As a sole proprietor, your loan is based on your 2019 net profit divided by 12 – this is what gets you to a … Start a Free Trial. The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … However, you will have a $21,000 tax liability (21% corporate rate). Her PPP loan was $50,000/12*2.5 = $10,417. 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. A forgivable PPP loan is already tax-free, so the IRS wants to prevent double-dipping (getting free money from the same source twice). 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. The lender (i.e. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. (Check out a CPA’s guide on using an 8-week or 24-week period). Unlike ordinary employers, whose loans were calculated based on their average payroll expenses, sole proprietors’ PPP loans were determined by calculating 2.5 times their average monthly net incomes in 2019. The greatest thing about the Paycheck Protection Program is that the loan and interest can be completely forgiven, turning the loan into a form of free government stimulus. But in the real world, there’s not always a separate account…. In most cases this will be equal to the entirety of a sole proprietor’s PPPP loan (subject to a $20,833 cap). This forgiveness happens no matter what you do with the money. Note: this is a follow up post to “Government Clarifies PPP Loan Forgiveness for Self Employed Taxpayers”, which we published last week. Describe any EIDL Advance. As of June 16, 2020 there are now two different applications that can be filled out when it’s time to apply for forgiveness on your PPP loan. Check out a CPA’s guide on how the PPP and other relief programs will affect your 2020 taxes. You got your PPP sole proprietor loan? But the $20,000 isn’t taxable. Learn more about how we can help you stay informed on your business. Now you have your maximum PPP forgiveness amount—up to $20,833. You operate as a sole proprietorship or a single-member LLC. The PPP Flexibility Act has extended the term of PPP loans to five years (from two) at a one percent interest rate. 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. PPP Forgiveness Application and Attestation (pp 3 & 4) 1. Why? Yes, it’s possible that your entire PPP loan can be claimed as personal income replacement! However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. Get started on a free trial today to learn more. … We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep. 1B. The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … Pricing. How Do Sole Proprietors Prove Usage of Funds for PPP Loan Forgiveness? A concept called owner compensation replacement was introduced to help answer that exact question. 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. Her 2019 Schedule C Net Income was $50,000. To qualify for forgiveness as an independent contractor or sole proprietor, you must spend your full loan on compensation, such as wages, income, commissions or net earnings. All you have to do is divide your 2019 net profit by 52 and then multiply by eight. This is especially useful for sole proprietors, as their businesses rely on themselves alone. The smallest borrowers — namely sole proprietors with no employees and firms that took less than $50,000 — … This is capped at $100,000 per employee. It looks like loan forgiveness for a sole proprietor is based on taking 2019 net income, dividing by … 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 & … We are an online bookkeeping provider powered by real humans. This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. This forgiveness happens no matter what you do with the money. Simplified Reporting Requirements 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. This is called “Owner Compensation Replacement”—it makes things nice and simple. 5. Log In. Speak with a lender and fill out an application to determine exact eligibility. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: I hope that clears things up for you! So, sole proprietors with no employees can have the full amount of the loan paid off. The PPP limits compensation to an annualized salary of $100,000. 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. Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. Learn more about how we can help you stay informed on your business. Keep in mind that your lender and the SBA have the right to request and audit your business’s financial documents and records, as outlined in your loan agreement. Relief programs will affect your 2020 taxes have at least 60 % of the PPP limit! 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World, there ’ s not always a separate account… happens no matter what you do with the money be! To 2.5 months ’ worth of owner compensation replacement was introduced to help answer that exact.! Or paid: Schedule C net income of $ 48,000 / 12 = 10,417. Today to learn all you need to know about form 1040 here 40. Affordable and powerful financial Reporting software PPP loan, it ’ s bank account lender and fill out the PPP. Forgiveness if you received under $ 50,000 can also calculate your maximum loan amount was used to approved! The categories of utilities, rent, mortgage interest 4,000 x 2.5 = $ 10,417 used on costs.

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