This is especially useful for sole proprietors, as their businesses rely on themselves alone. 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 & … Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete? 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. 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. 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. You can count rent, mortgage interest and utility payments toward forgiveness as well. All Rights Reserved. PPP Loan Forgiveness Application for Small Businesses. This is capped at $100,000 per employee. In that post we talked specifically about the new PPP forgiveness rules self-employed taxpayers (e.g., sole proprietors, … The PPP limits compensation to an annualized salary of $100,000. This number times 2.5 equals your PPP loan amount. Your net profit should be what is found on your Schedule C (also referred to as Form 1040). 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. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. 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). Reply. PPP Forgiveness Application and Attestation (pp 3 & 4) 1. 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. If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. Her loan forgiveness amount is automatically = $10,417. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. 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. Required fields are marked * Name * Email * Your Review. 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. Get started on a free trial today to learn more. Now the forgiveness comes in. How sole proprietor PPP loans are calculated. (Check out a CPA’s guide on using an 8-week or 24-week period). This form applies to you as long as you don’t have employees on payroll. So, sole proprietors with no employees can have the full amount of the loan paid off. Your bank might consider forgiveness if you comply with SBA Guidelines. 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. Schedule A instructions (p 5) 3. Applying for PPP Loan Forgiveness •Forgiveness Forms -11 pages •Breaks into five pieces; 1 and 2 must be submitted to Lender: 1. Example. Log In. 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. Sally is Sole Proprietor with no employees. Schedule A worksheet (p 9) 1. If you received your loan after June 5, 2020, you apply based on the 24-week period. Take 7 minutes to learn all you need to know about Form 1040 here. The money is to be spent on … Yes, it’s possible that your entire PPP loan can be claimed as personal income replacement! You received a PPP loan of any type. 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. This example happens to be the maximum loan amount any sole proprietor will be eligible for. However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven. 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 PPP Flexibility Act has extended the term of PPP loans to five years (from two) at a one percent interest rate. The forgivable portion is equal to 2.5 months’ worth of their 2019 net profit. This $669 billion-dollar loan program was designed to help businesses negatively affected by COVID-19 continue to pay their employees. The minimum 75% rule spent towards payroll costs to be eligible for full forgiveness has been decreased to 60%. But the $20,000 isn’t taxable. Your bank might consider forgiveness if you comply with SBA Guidelines. Let’s say a sole proprietor has 2019 net income of $48,000. 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. The best part? The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … To keep things simple, assume a sole proprietor received a $20,000 PPP loan based on the sole proprietorship earning $100,000 in 2019. 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. PPP Loan Forgiveness for Sole Proprietors: 100% for Salary? Eligibility requirements for PPP loan forgiveness include: The PPP loan amount was used to cover approved expenses. Remember, a sole member LLC files a Schedule C, so they are included here as well. Her PPP loan was $50,000/12*2.5 = $10,417. As we previously blogged, Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. Pricing. It looks like loan forgiveness for a sole proprietor is based on taking 2019 net income, dividing by … As a reminder, only businesses that were operating prior to February 15, 2020 are eligible for a PPP. Using the OCR, sole proprietors can claim forgiveness based upon 2019 net profit. 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. As a sole proprietor, 1099 contractor, single-member LLC, or a gig economy member, you may be eligible for a PPP loan. Generally, eligible expenses your business pays can be claimed as tax deductions. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: 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. Take 7 minutes to learn all you need to know about Form 1040 here. 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. 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). Let’s say a sole proprietor has 2019 net income of $48,000. Your personal bookkeeper will be there to walk you through everything so there’s zero learning curve. Whenever you’re talking taxes, reading about taxes, planning to reduce your business taxes, you first need to know how the … 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. If you correctly calculated the original PPP loan amount and spent those funds on forgivable costs, you should get full 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. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep. 2019 Net Sched C (Line 31) = $85,000. 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. These are advertised as being “fully forgivable.” But here’s where the “gotchas” set in. The lender (i.e. If the borrower obtained an EIDL advance, provide the amount and the EIDL application number. (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.) How Do Sole Proprietors Prove Usage of Funds for PPP Loan Forgiveness? But, as a sole proprietor, how can you prove the funds were used on a payroll if you don’t have payroll? 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. For Accountants. 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. A forgivable PPP loan is already tax-free, so the IRS wants to prevent double-dipping (getting free money from the same source twice). PPP loan forgiveness requirements. 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. Sign up for a trial of Bench. You do NOT get taxed as an S-Corporation. Continue with your ongoing bookkeeping and recordkeeping habits. Now you have your maximum PPP forgiveness amount—up to $20,833. Her 2019 Schedule C Net Income was $50,000. You will need to prove your expenses for utilities, rent, and mortgage interest. Our free PPP checklist can make staying on top of forgiveness a breeze. I hope that clears things up for you! Describe any EIDL Advance. They’ll get a $10,000 PPP loan. Good bookkeeping is essential if you have a PPP and helps you master your business. a CPA’s guide on how the PPP and other relief programs will affect your 2020 taxes. No pressure, no credit card required. 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. Bench’s monthly reports equip you with what you need for relief applications and beyond. Which means your PPP loan is roughly ten weeks worth of net profit. Speak with a lender and fill out an application to determine exact eligibility. 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. 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. No. This forgiveness happens no matter what you do with the money. You CAN have employees or subcontractors other than yourself. 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. However, you will have a $21,000 tax liability (21% corporate rate). All you have to do is divide your 2019 net profit by 52 and then multiply by eight. However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the amount for forgiveness. 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 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). Before we jump into loan forgiveness application forms (and how to determine which form is right for your business), let’s quickly review the requirements for PPP loan forgiveness. Bench assumes no liability for actions taken in reliance upon the information contained herein. UDPATE: Not so fast on this. Schedule A (p 6) 1. © 2020 Thatcher Law Firm. This forgiveness happens no matter what you do with the money. But in the real world, there’s not always a separate account…. Phone: 301-850-1246 Toll Free:  866-604-3882 Fax: 301-441-9602. 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. 1 (888) 760 1940. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. In most cases this will be equal to the entirety of a sole proprietor’s PPPP loan (subject to a $20,833 cap). The PPPFA lowers the threshold to … That means that the maximum possible loan amount is $20,833, and this entire amount can be used as personal income replacement. You operate as a sole proprietorship or a single-member LLC. You got your PPP sole proprietor loan? You got your PPP sole proprietor loan? 1B. Friends don’t let friends do their own bookkeeping. 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. Your email address will not be published. Here’s how forgiveness works for self-employed individuals. in order to have their entire loan forgiven. The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … 1B. For 100% of solo sole props, this means they will have at least some loan remaining in the end. The 8 week period applicable to forgiveness has been extended to 24 weeks. And note that a sole proprietor without employees enters zeros in both fields. Why? 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. You can review our article on Home Office Deductions and the PPP in just 3 minutes. Point 3 — Eventual forgiveness of the PPP loan is calculated as follows: 8 weeks worth of 2019 Schedule C income is … 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. 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. Hello, I have read the following online and wanted to get any professional opinion if accurate. Specify the forgiveness amount requested. Self-employed individuals can use a simplified forgiveness application we call the ‘EZ Form’. Forgiveness applications are not being accepted or processed just yet. The PPP loan has a two-year maturity timeline with a 1% interest rate. As long as they fit within the categories of utilities, rent, and mortgage interest, home office expenses can be forgiven. Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. 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). You do NOT receive a W-2 paycheck from your business. Yes! Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. 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? Note: this is a follow up post to “Government Clarifies PPP Loan Forgiveness for Self Employed Taxpayers”, which we published last week. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. 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. About 60% of the PPP loan must be used on payroll costs and 40% on non-payroll expenses. This is essentially your entire PPP loan, assuming your loan amount did not factor in additional payroll expenses. Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. It really is best if this is a separate business account! You got your PPP sole proprietor loan? Leave a Reply Cancel reply. 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. 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.) Answer: Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan … But the $20,000 isn’t taxable. That means the maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. : if you received under $ 50,000 processed just yet wanted to get any professional if..., D.C. by thatcherlawfirm | Sep 25, 2020, you will lose 21,000! 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