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Sole Proprietors with no Employees The biggest change in the PPP Flexibility Act was to increase the loan forgiveness amount for owner compensation to 2.5 months of 2019 net profit (rather than just 8 weeks). Point 3 — Eventual forgiveness of the PPP loan is calculated as follows: 8 weeks worth of 2019 Schedule C income is forgiven (apparently automatically). Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. You don’t need to spread out your payments. If you are self-employed, a sole proprietor or an independent contractor (1099) you may be eligible for the Payroll Protection Plan (PPP) loan forgiveness during the Coronavirus crisis, even though you have no employees. Simplify the loan application process with PPP Fast Lane. 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. This is … © 2020 | Cromwell Tax & Bookkeeping, LLC | All Rights Reserved. The mailing of this email is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Has no more than 300 employees; and. Since then, changes have been made to make PPP loan forgiveness for the self-employed easier to obtain. If you are self-employed and have no employees, the SBA provides the following instructions in the March 3, 2021 for new PPP loan borrowers: If you have no employees, use the following methodology to calculate your maximum loan amount: On June 17th, the Paycheck Protection Program (PPP) Flexibility Act of 2020 was enacted which made major changes to the provisions for PPP loan forgiveness and the SBA released revised forgiveness applications.Over the next week we will publish articles outlining the changes to the PPP program by business type. Question 2. Self-employed individuals can use the newly released EZ application form so long as there are no employees on the payroll. Your loan amount should be equal to this number times 2.5. If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. Now, many of those sole proprietors are asking how to obtain full forgiveness of PPP loans in the absence of payroll documentation. And your forgiveness will be based on the same amount. In essence, the PPP loan should be roughly ten weeks’ worth of 2019 net profit. The biggest change in the PPP Flexibility Act was to increase the loan forgiveness amount for owner compensation to 2.5 months of 2019 net profit (rather than just 8 weeks). You can still pay them with your loan, as they qualify as a legitimate expense, but that portion you spend on them will not qualify for loan forgiveness if it is used to pay independent contractors. So, sole proprietors with no employees can have the full amount of the loan paid off. Since the forgiveness amount for sole proprietor owner compensation is automatic, it is unclear if any forms will need to be filed to request forgiveness. This means that your PPP loan should roughly be ten weeks worth of your net profit. Forms 3508S and 3508EZ are simplified versions of form 3508. In those circumstances, because PPP income is capped at $100,000, the maximum amount allowed as OCR over the 2.5 months is $20,833. Remember, if you choose the new the 24 week forgiveness window, 100% of a sole proprietor’s PPP can be forgiven. 1. Absent clear resolution and a favorable determination, borrowers may need to report the amount of the OCR as taxable personal income. New Easy Road to 100 Percent Forgiveness. As long as you don’t have employees on payroll, this form applies to you. Fill out your business information. The first step is to fill out your identifying information. If you do have payroll expenses, you can use the standard Form 3508. As a Schedule C taxpayer with no employees, you have no payroll. The PPP caps forgiveness on salaries, commissions, wages and tips at $100,000 per year — per employee. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs. These are people filing Form 1040, Schedule C like sole proprietors, partnerships, and LLC’s. For more information about how to prepare for PPP loan forgiveness, visit our PPP forgiveness FAQ. The new rules also state, “Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed.”. (Of course, by the end of the week, Congress may come out with another change to the program and we can do this all over again.. sigh…). We now have both the new clarity and an easy road to Paycheck Protection Program (PPP) loan forgiveness for the self-employed with no employees. Payroll is the primary qualifying expense. While the CARES Act indicates that forgiven PPP amounts will not be taxed, this doesn’t clearly account for the OCR’s expressed purpose as a substitute for actual income. Previously received a First Draw PPP loan and will or has used the full amount only for authorized uses. If you plan to use the paid sick leave refundable credit on your 2020 taxes, you can’t count paid sick leave or family leave toward PPP forgiveness. Her PPP loan was $50,000/12*2.5 = $10,417. Tax credits. Sole proprietors were eligible to apply in … On the other hand, if a borrower utilizes the 24 week covered period authorized by the Flexibility Act, 2.5 months of 2019 net profit as reported on Schedule C can be claimed for forgiveness. When the Paycheck Protection Program (“PPP”) first was launched, the SBA portal was available to small businesses that could evidence loan application amounts based upon documented payrolls. Employees seeking assistance with labor or employment issues should contact a law firm that represents employees and should not provide information about your situation to DRM. That new rule says borrowers can receive full forgiveness of their loan regardless of changes in employee headcounts or pay … If a sole proprietor employs no W-2 employees, the maximum first draw PPP loan equals $20,833. It looks like loan forgiveness for a sole proprietor is based on taking 2019 net income, dividing by 52 and multiplying by 8. 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. In particular, please note that Downs Rachlin Martin’s Labor & Employment Group exclusively represents employers/management in labor and employment matters. Yes—but this is not a payroll check. As a sole proprietor, your loan is based on your 2019 net profit divided by 12 – this is what gets you to a monthly average net profit. Generally, enterprises that received PPP loans under $2 million should use PPP Loan Forgiveness Application Form 3508S (commonly known as SBA Form 3508) to apply for forgiveness. That included a 14-day period in which only companies with 20 employees or fewer could apply for PPP loans. Later, the PPP was opened to sole proprietors who report income on Schedule C filings instead of via payroll. (To receive that loan amount, the sole proprietor needs to generate at least $100,000 in gross income in either 2019 or 2020.) This monthly “average” net profit is then multiplied 2.5 times to equal the PPP loan amount. 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 share. Government Clarifies PPP Loan Forgiveness for the Self-Employed. Here is a link to the. 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. ONE LAST WORD OF CAUTION – It has not been clearly resolved for sole proprietors whether using OCR becomes a taxable event. The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP Loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483). It is not necessary to document any payroll. 2. Her loan forgiveness amount is automatically = $10,417. The Paycheck Protection Program was introduced in April 2020 and offered fully forgivable loans to the self-employed. For businesses without employees or payroll, the loan amounts then have to be calculated based on profit. Independent contractors, gig workers, sole proprietors, and eligible self-employed individuals can qualify for up to $50,000 in forgivable PPP loans for 2021! The loan forgiveness is not taxable for California purposes. However, borrowers that meet one of three criteria can use the much … ... Any business receiving a PPP loan can receive loan forgiveness if the funds are used for paying certain qualifying expenses within a certain timeframe. Applying for PPP Forgiveness. Self-employed individuals can use the newly released EZ application form so long as there are no employees on the payroll. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. Before sending, please note: Information on www.drm.com is for general use and is not legal advice. 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 $40,000 net-income, equates to $8,333 Anything that you send to anyone at our Firm will not be confidential or privileged unless we have agreed to represent you. Independent contractors do not count as employees under the Paycheck Protection Program. Regarding “expenses,” FTB has stated: Schedule C PPP loan borrowers with no employees are not required to reduce their expense deductions “to the extent the borrower applied all funds to payroll.” EXAMPLE: let’s say Line 31 is $150,000. PPP FORGIVENESS for Sole Props and single member LLCs with No Employees - YouTube. Borrowers who fall short of 100% forgiveness using solely the OCR will have to document spending any remaining PPP loan funds on allowable non-payroll expenses such as utilities, rent, and mortgage interest expenses in order for the PPP loan to be 100% forgiven. Although the loan request is based on 2.5 x the monthly average ( ÷ 12), the forgiveness is only 8 weeks of the weekly average, which comes out to 73.85% The short answer is that PPP loan amounts are typically calculated based on businesses’ average payroll expenses. Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. We built Fast Lane for you. Your lending institution will likely send you the forgiveness application. On October 7, 2020, the Small Business Administration issued a new rule for PPP loan borrowers who received $50,000 or less in proceeds. If you send this email, you confirm that you have read, understand and agree to the terms contained herein. Using the OCR, sole proprietors can claim forgiveness based upon 2019 net profit. This forgiveness happens no matter what you do with the money. 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. So, sole proprietors with no employees can have the full amount of the loan paid off. To apply for PPP loan forgiveness, self-employed individuals can use the simplified Form 3508EZ. First Draw PPP Loan If You Have No Employees. Her 2020 income and/or what she does with the PPP money does not matter. Your PPP loan was based on your 2019 net profit. Claudia Radu, a sole proprietor who runs Vinyl Creations by CR in Woodstock, Georgia, hopes that the new guidelines will mean a larger loan for her craft business. The loan amount is $100,000 divided by 12 x 2.5 = $20,833. Generally, the PPP loan amount that businesses qualify for is based on 2.5 months of average payroll expenses. For a little extra context, sole props and LLCs don’t have a separate tax liability like corporations do. 2019 Net Sched C (Line 31) = $85,000. This example happens to be the maximum loan amount any sole proprietor will be eligible for. The Small Business Administration is ready to accept updated PPP loan applications from sole proprietors looking to take advantage of the new loan calculation. The guidance does not apply to S or C corporations. Sally is Sole Proprietor with no employees. Say thanks to the Paycheck Protection Program Flexibility Act of 2020. Borrowers who fall short of 100% forgiveness using solely the OCR will have to document spending any remaining PPP loan funds on allowable non-payroll expenses such as utilities, rent, and mortgage interest expenses in order for the PPP loan to be 100% forgiven. Because most self-employed individuals do not pay themselves through payroll, the PPP has introduced a concept known as Owner Compensation Replacement (“OCR”) which allows sole proprietors to claim forgiveness amounts to make up for lost income without reliance upon documented evidence of payroll. For our purposes, I will focus on partnerships and LLC’s. In those circumstances, because PPP income is capped at $100,000, the maximum amount allowed as OCR over the eight weeks is $15,385.

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