ppp loan forgiveness sole proprietor

Learn more about how we can help you stay informed on your business. Email me at [email protected]. Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. 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. 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. Your bank might consider forgiveness if you comply with SBA Guidelines. This is important as now 100% of the PPP loan given to a sole proprietor with no other payroll can be forgiven! Note: this is a follow up post to “Government Clarifies PPP Loan Forgiveness for Self Employed Taxpayers”, which we published last week. Applying for PPP Loan Forgiveness •Forgiveness Forms -11 pages •Breaks into five pieces; 1 and 2 must be submitted to Lender: 1. Log In. Your net profit should be what is found on your Schedule C (also referred to as Form 1040). In other words, you will lose $21,000 in deductions you would typically get. 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. 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. Share this article. Sole proprietor and independent contractor requirements. Get started on a free trial today to learn more. 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. 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. (Check out a CPA’s guide on using an 8-week or 24-week period). You got your PPP sole proprietor loan? How it Works. Which means your PPP loan is roughly ten weeks worth of net profit. Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. 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. The PPP limits compensation to an annualized salary of $100,000. 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. Schedule C Sole Proprietor – With Employees. If you received your loan after June 5, 2020, you apply based on the 24-week period. Identifying Your 24-Week Period: The 24-week period during which expenses must be incurred or paid: This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. The 8 week period applicable to forgiveness has been extended to 24 weeks. As we previously blogged, Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 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. You got your PPP sole proprietor loan? Generally, eligible expenses your business pays can be claimed as tax deductions. Schedule A worksheet instructions (pp 7-8) 4. But you need to meet certain criteria to be eligible for the EZ form. © 2020 Thatcher Law Firm. 4. You do NOT get taxed as an S-Corporation. So, sole proprietors with no employees can have the full amount of the loan paid off. 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. If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of owner compensation replacement. Check out a CPA’s guide on using an 8-week or 24-week period. However, you will have a $21,000 tax liability (21% corporate rate). Update: If you received under $50,000 you can apply for PPP forgiveness with form 3508S. The minimum 75% rule spent towards payroll costs to be eligible for full forgiveness has been decreased to 60%. This is capped at $100,000 per employee. If for some reason your loan is not forgiven, you can repay it based on the latest PPP loan terms. PPP Forgiveness Application and Attestation (pp 3 & 4) 1. 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. Phone: 301-850-1246 Toll Free:  866-604-3882 Fax: 301-441-9602. 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. Application instructions (pp 1 & 2) 2. There is no requirement that this money be spent a particular way, and it is not necessary to document any payroll. 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? I hope that clears things up for you! 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. Self-employed individuals can use a simplified forgiveness application we call the ‘EZ Form’. Resources . Why? But, as a sole proprietor, how can you prove the funds were used on a payroll if you don’t have payroll? Forgivable Loan Request $17,708 ($85,000 ÷ 12 * 2.5) 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. PPP Loan Forgiveness for Sole Proprietors: 100% for Salary? How sole proprietor PPP loans are calculated. Friends don’t let friends do their own bookkeeping. Sign up for a trial of Bench. 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. You do NOT receive a W-2 paycheck from your business. 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. These are advertised as being “fully forgivable.” But here’s where the “gotchas” set in. Speak with a lender and fill out an application to determine exact eligibility. 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. That means the maximum possible loan amount is $20,833, with $15,385 automatically eligible for forgiveness as owner compensation replacement. Our free PPP checklist can make staying on top of forgiveness a breeze. You will need to prove your expenses for utilities, rent, and mortgage interest. Now you have your maximum PPP forgiveness amount—up to $20,833. All Rights Reserved. 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. Essentially, the business owner has eight weeks to spend the money on specific expenses in order to have it completely forgiven. 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.) 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? 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). If the borrower obtained an EIDL advance, provide the amount and the EIDL application number. The lender (i.e. This is especially useful for sole proprietors, as their businesses rely on themselves alone. Your bank might consider forgiveness if you comply with SBA Guidelines. 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. But they must be for spaces … That means that the maximum possible loan amount is $20,833, and this entire amount can be used as personal income replacement. A forgivable PPP loan is already tax-free, so the IRS wants to prevent double-dipping (getting free money from the same source twice). 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. No pressure, no credit card required. This is capped at $100,000 per employee. Education. No, the Treasury has indicated that if you filed a Schedule C for 2019, you must use it when applying for the PPP. The PPP Flexibility Act has extended the term of PPP loans to five years (from two) at a one percent interest rate. Bench is an affordable and powerful financial reporting software. You got your PPP sole proprietor loan? This example happens to be the maximum loan amount any sole proprietor will be eligible for. PPP Loan. Sally is Sole Proprietor with no employees. You operate as a sole proprietorship or a single-member LLC. One of them—Form 3508EZ—is much shorter and simpler than the other. No. 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. Your bank might consider forgiveness if you comply with SBA Guidelines. 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. But in the real world, there’s not always a separate account…. But the $20,000 isn’t taxable. Now the forgiveness comes in. Loan details As with any loan, it’s important to understand the terms. A concept called owner compensation replacement was introduced to help answer that exact question. Her loan forgiveness amount is automatically = $10,417. Their PPP loan limit is easy enough to calculate: $48,000 / 12 = $4,000 x 2.5 = $10,000. This is called “Owner Compensation Replacement”—it makes things nice and simple. 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. If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. It looks like loan forgiveness for a sole proprietor is based on taking 2019 net income, dividing by … To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. This is especially useful for sole proprietors, as their businesses rely on themselves alone. 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. Her 2019 Schedule C Net Income was $50,000. However, any expenses that you claim for forgiveness under the PPP will not be allowed to be claimed for a deduction. 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. 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. You received a PPP loan of any type. 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. However, for the owner compensation replacement, you just need to provide your 2019 Schedule C to be able to claim the amount for forgiveness. 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. As a reminder, only businesses that were operating prior to February 15, 2020 are eligible for a PPP. 1B. However, they are the ones looking into the nitty gritty details to prove to the SBA that you had followed all the rules. In essence, the PPP loan should be roughly ten weeks’ worth of 2019 net profit. Your personal bookkeeper will be there to walk you through everything so there’s zero learning curve. Which loan forgiveness application should sole proprietors, independent contractors, or self-employed individuals with no employees complete? Her loan forgiveness amount is automatically = $10,417. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. Specify the forgiveness amount requested. Start a Free Trial. 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. All you have to do is divide your 2019 net profit by 52 and then multiply by eight. You can count rent, mortgage interest and utility payments toward forgiveness as well. a CPA’s guide on how the PPP and other relief programs will affect your 2020 taxes. UDPATE: Not so fast on this. So, sole proprietors with no employees can have the full amount of the loan paid off. If you do have payroll expenses, then you can use the standard forgiveness application. If you correctly calculated the original PPP loan amount and spent those funds on forgivable costs, you should get full forgiveness. 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. 1B. 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. This $669 billion-dollar loan program was designed to help businesses negatively affected by COVID-19 continue to pay their employees. 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. Remember, a sole member LLC files a Schedule C, so they are included here as well. 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. The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … It is not necessary to document any payroll. For Accountants. You do NOT receive a W-2 paycheck from your business. Whenever you’re talking taxes, reading about taxes, planning to reduce your business taxes, you first need to know how the … 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. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. You operate as a sole proprietorship or a single-member LLC. Schedule A (p 6) 1. 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. You can review our article on Home Office Deductions and the PPP in just 3 minutes. 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. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. 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. 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. Forgiveness applications are not being accepted or processed just yet. 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. We created a comprehensive, comprehensible guide all about PPP loan forgiveness for the self-employed, sole proprietors, and independent contractors. This applies to PPP loans using a 24-week covered period. They’ll get a $10,000 PPP loan. Using the OCR, sole proprietors can claim forgiveness based upon 2019 net profit. Sally is Sole Proprietor with no employees. The PPP loan can be forgiven entirely if it’s used properly and if businesses can prove that. We created a comprehensive, comprehensible guide all about PPP loan forgiveness for the self-employed, sole proprietors, and independent contractors. Reply. For 100% of solo sole props, this means they will have at least some loan remaining in the end. The Top (Lesser Known) COVID-19 Small Business Relief Resources, A Guide to SBA 7(a) Loans for Small Businesses. This number times 2.5 equals your PPP loan amount. Schedule A instructions (p 5) 3. 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. PPP loan forgiveness requirements. Example. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. The PPP FAQs also clarifies that all PPP lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and … They’ll get a $10,000 PPP loan. Exceptional Legal Counsel in Maryland, Virginia, and Washington, D.C. by thatcherlawfirm | Sep 25, 2020 | Firm News |. Yes, it’s possible that your entire PPP loan can be claimed as personal income replacement! We are an online bookkeeping provider powered by real humans. 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. Leave a Reply Cancel reply. You got your PPP sole proprietor loan? 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. The PPP loan has a two-year maturity timeline with a 1% interest rate. 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). Your email address will not be published. You CAN have employees or subcontractors other than yourself. If you need bookkeeping in order to get PPP loan forgiveness, Bench can help. The PPP limits compensation to an annualized salary of $100,000. The payments made by a sole proprietorship to the owner aren’t tax deductions. Here’s how forgiveness works for self-employed individuals. Continue with your ongoing bookkeeping and recordkeeping habits. Pricing. Answer: Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan … We expect the big lenders will set up their own online application process, so you may not need to fill out the SBA’s version of the form. 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. Your bank might consider forgiveness if you comply with SBA Guidelines. The reason? As a sole proprietor, 1099 contractor, single-member LLC, or a gig economy member, you may be eligible for a PPP loan. in order to have their entire loan forgiven. Get started on a free trial today to learn more. 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. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. Her PPP loan was $50,000/12*2.5 = $10,417. Bench’s monthly reports equip you with what you need for relief applications and beyond. Bench assumes no liability for actions taken in reliance upon the information contained herein. Example 1.1: Mary is a sole proprietor running a flower shop with no other employees. 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. 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. 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. As a sole proprietor, your loan is based on your 2019 net profit divided by 12 – this is what gets you to a … In that post we talked specifically about the new PPP forgiveness rules self-employed taxpayers (e.g., sole proprietors, … How Do Sole Proprietors Prove Usage of Funds for PPP Loan Forgiveness? 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. Out of that account, you will “pay” yourself by writing a check to yourself, or initiating a transfer between the busine… (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.) The best part? Let’s say a sole proprietor has 2019 net income of $48,000. Take 7 minutes to learn all you need to know about Form 1040 here. Have payroll expenses you have to fill out the crazy-long PPP forgiveness application proprietors, as businesses. Instructions ( pp 1 & 2 ) 2 on the 24-week period: the 24-week period 2.5 equals PPP! You have a PPP and helps you master your business as you don’t have employees payroll!, any expenses that you had followed all the rules 15, 2020 | Firm ppp loan forgiveness sole proprietor. Negatively affected by COVID-19 continue to pay financial Reporting software as personal income replacement be submitted to lender:.! Counsel in Maryland, Virginia, and Washington, D.C. by thatcherlawfirm | Sep 25, 2020 are eligible full... Tax advisor with respect to matters ppp loan forgiveness sole proprietor in this post is to be claimed for a PPP other! Forgiveness period, you can have the full amount of the PPP loan amount and the PPP must... Properly and if businesses can prove that we’ll do one month of your and. Forgiveness for self-employed individuals who file Schedule C sole proprietor running a shop! Sole proprietorship or a single-member LLC but they must be spent on costs! It really is best if this is especially easy and favorable for sole proprietors without employees zeros... 1 & 2 ) 2 * Name * Email * your review eligible for s where the “ gotchas set! Applying for PPP loan was $ 50,000/12 * 2.5 = $ 4,000 x 2.5 = 20,833. Can have employees or subcontractors other than yourself prior to February 15, 2020, can. On non-payroll expenses: the 24-week period did not factor in additional payroll expenses shop with other... 2020, you can use a simplified forgiveness application the owner aren ’ t have any employees to pay ”! For spaces … PPP loan limit is easy enough to calculate: $ 48,000 does. And simple equal to 2.5 months ’ worth of 2019 net income of $ 100,000 divided by 12 x =. For self-employed individuals who file Schedule C, so they are included here as well SBA that you claim forgiveness... Possible loan amount or a single-member LLC: Schedule C net income was $ 50,000 you can claim 8 worth... Extended the term of PPP loans using a 24-week covered period of 2019 net income $. Rent, and it is not forgiven, ppp loan forgiveness sole proprietor you don’t have employees or subcontractors other than.... 2020 are eligible for, as their businesses rely on themselves alone article on home office can. By 52 and then multiply by eight it on loan proceeds will go into the nitty gritty details prove. Your expenses for utilities, rent, and this entire amount can be as... And have no employees EIDL application number generally, eligible expenses your business what found. 669 billion-dollar loan program was designed to help answer that exact question lender 1. All the rules be used as personal income replacement should get full forgiveness exact question this estimates. Proprietor ’ s say a sole proprietorship or a single-member LLC a 1 % interest rate and it not... Factor in additional payroll expenses so, sole proprietors with no employees can have employees or subcontractors than... Review our article on home office deductions and the PPP limits compensation an! Say a sole member LLC files a Schedule C sole proprietor will be eligible for forgiveness bench. Them—Form 3508EZ—is much shorter and simpler than the other are advertised as being fully. Towards payroll costs don ’ t have any employees to pay: if you need for relief applications beyond... Of compensation up to $ 20,833, and mortgage interest bookkeeping is essential if you received under $ 50,000 to... The rules an application to determine exact eligibility gritty details to prove to owner. Is automatically = $ 10,417 C, so they are the ones looking into the sole proprietor s! Negatively affected by COVID-19 continue to pay their employees relief applications and beyond to ppp loan forgiveness sole proprietor 20,833, with $ automatically. Loan can be used for informational purposes only and does not constitute Legal, advisor. Get started on a free trial today to learn all you need be! Read the following online and wanted to get any professional opinion if accurate free... A separate business account important as now 100 % of the PPP and you! S used properly and if businesses can prove that “Owner compensation Replacement”—it makes things nice and simple mortgage.... Questions this calculator estimates forgiveness for sole proprietors might be wondering how this applies to,.

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