Many sole proprietors and independent contractors felt left out on the initial PPP loan process. In fact, if they were lucky enough to secure loan funding on the first round, it was unclear as to how the loan would be forgiven. Whether you received relief on the first round or you are applying for a PPP loan on round two, we now have more guidance.
Unlike your corporate counterparts, you don’t pay yourself traditional payroll. That created some challenges as accountants were unable to advise their clients on how to show proof of wages paid in the eight weeks after loan proceeds were disbursed. As it turns out, it’s going to be a much more mechanical process.
Here is the payroll portion formula: 2019 net income on your Schedule C tax return (last year’s taxes) X (8 weeks/52 weeks in a year) = payroll portion loan forgiveness. For example:
$80,000 net profit on my 2019 tax return X 15.38% (8/52) = $12,308 forgiven. Please keep in mind you were eligible to receive 2.5 times your monthly average from your SBA application, or in this case, $16,667. That means while $12,308 of the $16,667 received is automatically forgiven, the other $4,359 is not. You will need to show rent paid, business related mortgage interest, and business related utilities. If those other expenses do not equal the difference, the remaining portion will default to a 2 year loan at 1% interest that needs to be repaid. Be aware, don’t spend the money and believe it will automatically be forgiven!
Here are some other important points:
1.) The $100,000 net income cap still applies, not only to your initial SBA application, but also to the forgiveness component.
2.) As of now, there is an SBA imposed requirement that 75% of the proceeds need to be used for payroll. This wasn’t in the congressional legislation, it was a rule created by SBA itself. It’s a curious number as you can see from the example above, the maximum payroll forgiveness is just under 74% of the total proceeds. We expect SBA to eventually correct this issue or offer more guidance.
3.) What if you haven’t filed your 2019 taxes yet? Most lenders are allowing you to prepare a “Draft” Schedule C return for the purposes of applying for the loan. We assume any loan forgiveness will likely mandate a copy of your actual 2019 filed Schedule C.