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. Describe any EIDL Advance. Remember, if you choose the new the 24 week forgiveness window, 100% of a sole proprietor’s PPP can be forgiven. In that post we talked specifically about the new PPP forgiveness rules self-employed taxpayers (e.g., sole proprietors, … 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. 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. Share this article. Get started on a free trial today to learn more. You got your PPP sole proprietor loan? No. 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). 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. If you received your loan after June 5, 2020, you apply based on the 24-week period. Using the OCR, sole proprietors can claim forgiveness based upon 2019 net profit. Generally, the PPP loan amount that businesses qualify for is based on their average payroll expenses. Let’s say a sole proprietor has 2019 net income of $48,000. If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. Yes, itâs possible that your entire PPP loan can be claimed as personal income replacement! Schedule C Sole Proprietor – With Employees. Yes! 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 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. You do NOT receive a W-2 paycheck from your business. Her PPP loan was $50,000/12*2.5 = $10,417. 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. But they must be for spaces … Schedule A worksheet (p 9) 1. Sally is Sole Proprietor with no employees. They’ll get a $10,000 PPP loan. You received a PPP loan of any type. Your personal bookkeeper will be there to walk you through everything so thereâs zero learning curve. Leave a Reply Cancel reply. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. 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. 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? Loan details As with any loan, it’s important to understand the terms. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. PAYCHECK PROTECTION PROGRAM (PPP) LOAN FORGIVENESS PRE-WORK EXAMPLES ® Chase for Business | Loan Forgiveness pre-work examples 2 ABC Cookies received $20,833.00 in a PPP loan on May 4, 2020, and spent the funds across an 8-week Covered Period, which ended on June 29. But in the real world, there’s not always a separate account…. 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. You CAN have employees or subcontractors other than yourself. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. Exceptional Legal Counsel in Maryland, Virginia, and Washington, D.C. by thatcherlawfirm | Sep 25, 2020 | Firm News |. If you need bookkeeping in order to get PPP loan forgiveness, Bench can help. All you have to do is divide your 2019 net profit by 52 and then multiply by eight. The payments made by a sole proprietorship to the owner aren’t tax deductions. Speak with a lender and fill out an application to determine exact eligibility. Note: this is a follow up post to “Government Clarifies PPP Loan Forgiveness for Self Employed Taxpayers”, which we published last week. 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. Check out a CPAâs guide on how the PPP and other relief programs will affect your 2020 taxes. Under the PPP Flexibility Act, you can also calculate your maximum loan based on eight weeks of compensation up to $15,385. But the $20,000 isn’t taxable. Schedule A instructions (p 5) 3. Friends donât let friends do their own bookkeeping. Schedule A (p 6) 1. It really is best if this is a separate business account! 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. PPP Forgiveness Application and Attestation (pp 3 & 4) 1. They’ll get a $10,000 PPP loan. Your bank might consider forgiveness if you comply with SBA Guidelines. 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. PPP Loan. Continue with your ongoing bookkeeping and recordkeeping habits. This is especially useful for sole proprietors, as their businesses rely on themselves alone. Learn more about how we can help you stay informed on your business. 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. Bench is an affordable and powerful financial reporting software. The money is to be spent on … However, you will have a $21,000 tax liability (21% corporate rate). 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). However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. Whenever you’re talking taxes, reading about taxes, planning to reduce your business taxes, you first need to know how the … 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? Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. For 100% of solo sole props, this means they will have at least some loan remaining in the end. The PPP Flexibility Act has extended the term of PPP loans to five years (from two) at a one percent interest rate. This form applies to you as long as you donât have employees on payroll. 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 . For Accountants. If for some reason your loan is not forgiven, you can repay it based on the latest PPP loan terms. (Check out a CPAâs guide on using an 8-week or 24-week period). It looks like loan forgiveness for a sole proprietor is based on taking 2019 net income, dividing by … Now the forgiveness comes in. Sign up for a trial of Bench. The amount of Owner Compensation Replacement youâre 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). Simplified Reporting Requirements 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. Weâll do one month of your bookkeeping and prepare a set of financial statements for you to keep. Hereâs how forgiveness works for self-employed individuals. You operate as a sole proprietorship or a single-member LLC. Your net profit should be what is found on your Schedule C (also referred to as Form 1040). Education. Disclaimer | Site Map | Privacy Policy | Business Development Solutions by FindLaw, part of Thomson Reuters, How to Get PPP Loan Forgiveness as a Sole Proprietor, An Employer’s Guide to the COVID-19 Vaccine, SBA Cracks Down on PPP Abuse With New “Necessity Questionnaire”, AP Investigation Finds Sexual Misconduct In High Ranks Of FBI, Fourth Circuit Sheds Light on “Reasonable” Accommodation Requests, Tipped Workers Deserve Protection From Harassment By Customers. That means the maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. Your bank might consider forgiveness if you comply with SBA Guidelines. 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. You got your PPP sole proprietor loan? This is called âOwner Compensation Replacementââit makes things nice and simple. Phone: 301-850-1246 Toll Free: 866-604-3882 Fax: 301-441-9602. Required fields are marked * Name * Email * Your Review. Email me at [email protected]. Let’s look at the calculation. 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. 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. You received a PPP loan of any type. According to the original CARES Act rules for PPP loans, no forgiveness was allowed unless the borrower spent at least 75% of loan proceeds on payroll expenses. Self-employed individuals can use a simplified forgiveness application we call the âEZ Formâ. 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. 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. 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 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. 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 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. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: 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. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. Bench assumes no liability for actions taken in reliance upon the information contained herein. The 8 week period applicable to forgiveness has been extended to 24 weeks. The reason? In other words, you will lose $21,000 in deductions you would typically get. As a sole proprietor, your loan is based on your 2019 net profit divided by 12 – this is what gets you to a … Your email address will not be published. The smallest borrowers — namely sole proprietors with no employees and firms that took less than $50,000 — … 5. A forgivable PPP loan is already tax-free, so the IRS wants to prevent double-dipping (getting free money from the same source twice). How it Works. There is no requirement that this money be spent a particular way, and it is not necessary to document any payroll. Eligibility requirements for PPP loan forgiveness include: The PPP loan amount was used to cover approved expenses. Applying for PPP Loan Forgiveness •Forgiveness Forms -11 pages •Breaks into five pieces; 1 and 2 must be submitted to Lender: 1. But you need to meet certain criteria to be eligible for the EZ form. 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. This applies to PPP loans using a 24-week covered period. But, as a sole proprietor, how can you prove the funds were used on a payroll if you don’t have payroll? 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. This forgiveness happens no matter what you do with the money. You do NOT get taxed as an S-Corporation. Let’s say a sole proprietor has 2019 net income of $48,000. Specify the forgiveness amount requested. 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. Our 4 minute guide about Owner Compensation Replacement breaks down some common questions about using it, including if itâs compatible with PUA (spoiler alertâitâs not). 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.) Forgiveness applications are not being accepted or processed just yet. Now, how do you get that amount forgiven, since you donât have payroll to spend it on? 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. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. Schedule A worksheet instructions (pp 7-8) 4. A concept called owner compensation replacement was introduced to help answer that exact question. How sole proprietor PPP loans are calculated. You do NOT get taxed as an S-Corporation. The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … Essentially, the business owner has eight weeks to spend the money on specific expenses in order to have it completely forgiven. a CPAâs guide on how the PPP and other relief programs will affect your 2020 taxes. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. Your bank might consider forgiveness if you comply with SBA Guidelines. The loan amount is $100,000 divided by 12 x 2.5 = $20,833. 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. Reply. 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. … 1 (888) 760 1940. Learn more about how we can help you stay informed on your business. UDPATE: Not so fast on this. However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the amount for forgiveness. If the borrower obtained an EIDL advance, provide the amount and the EIDL application number. Sole proprietor and independent contractor requirements. These are advertised as being “fully forgivable.” But here’s where the “gotchas” set in. The PPP loan can be forgiven entirely if it’s used properly and if businesses can prove that. Take 7 minutes to learn all you need to know about Form 1040 here. That means that the maximum possible loan amount is $20,833, and this entire amount can be used as personal income replacement. This number times 2.5 equals your PPP loan amount. This is capped at $100,000 per employee. 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. One of them—Form 3508EZ—is much shorter and simpler than the other. If you do have payroll expenses, then you can use the standard forgiveness application. Keep in mind that your lender and the SBA have the right to request and audit your businessâs financial documents and records, as outlined in your loan agreement. Log In. 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. We are an online bookkeeping provider powered by real humans. Remember, a sole member LLC files a Schedule C, so they are included here as well. 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 & … 2019 Net Sched C (Line 31) = $85,000. The PPP limits compensation to an annualized salary of $100,000. PPP Loan Forgiveness Application for Small Businesses. Now the forgiveness comes in. 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. Start a Free Trial. 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