PPP Maths for the Self-Employed: And, yes, there is still time | Verrille
The Small Business Administration reports that as of May 23, it still had nearly $ 150 billion in untapped paycheck protection program funds. The program has been underutilized by independent business owners, in part because of its complexity. These micro-enterprises, however, represent a significant portion of the US economy and would generally be eligible for PPP funding.
This article illustrates the potential benefits of a PPP for an independent owner without employees. If you are employed by your S corp or C corp, this article is not for you. But if you have done business as a sole proprietor or through a wholly owned LLC that is not counted for tax purposes, and if you are reporting business income on the schedule C of your 1040 tax return form, you may want to be careful.
THE POSSIBLE LOAN AMOUNT. To calculate the potential amount of your loan:
- Step 1: Find your 2019 net income amount from IRS Schedule C Form 1040 (if you haven’t yet filed a 2019 return, fill it out and calculate the value).
- If your Schedule C for 2019 shows a loss or breakeven point for your business, then you are not eligible for a PPP loan.
- If your Schedule C for 2019 shows more than $ 100,000 in net income, ignore the part greater than $ 100,000, but you are still eligible on that first $ 100,000.
- If your business wasn’t in operation in 2019, but was on February 15, 2020, and you plan to report net income on Schedule C of your 2020 tax return, the SBA has promised – but not yet released. – guidelines for your situation. Stay tuned …
- 2nd step: Calculate the average monthly net profit amount (divide the amount from step 1 by 12).
- If the business is seasonal and your income fluctuates significantly from quarter to quarter, it looks like you are stuck with the monthly average. The SBA’s guidelines for seasonal businesses, however, suggest that the possibility of a different result. So stay tuned …
- Step 3: Multiply the average monthly net profit amount from step 2 by 2.5.
- Step 4: If you received an Economic Disaster Loan (EIDL) between January 31, 2020 and April 3, 2020, you can add this amount in step 3. What you are doing here is using PPP funds to refinance the EIDL. The EIDL grant part (called an “advance”) cannot be included here, as it does not have to be repaid.
The figure obtained is the maximum amount of your loan. We call this a “loan,” but in reality all or most of your P3 loan will likely be forgiven – making this an attractive proposition to many independent homeowners. However, beware of the following obstacles that could prevent you from qualifying:
Past sins. You will generally not be eligible for a P3 loan if the answer to any of the following questions is “Yes”:
- Previous offenses. Have you, or any business owned or controlled by you, ever obtained a direct or guaranteed loan from the SBA or any other federal agency that is currently in default or has defaulted within the past 7 years and has caused a loss to the government ?
- Convictions for felony. In the past 5 years, have you been convicted of any felony, including a guilty plea or claiming nolo, or have you been placed on pre-trial diversion or on parole or probation for a felony?
- Criminal proceedings in progress. Are you now the subject of an indictment, criminal investigation, indictment or other means by which formal criminal charges have been laid against you in any jurisdiction, or are you- are you currently incarcerated or on probation or parole?
Part-time resident. If the United States is not your primary place of residence, you will not be eligible.
Interrupted / dormant activity. Typically, you must provide documentary evidence that you were in business on or around February 15, 2020. If, however, you can establish that your business is seasonal and therefore was dormant in February, you should still be eligible if you can demonstrate that you had 8 weeks of operation during the 4.5 month period from May 1 to September 15, 2019. (It is not yet clear whether these 8 weeks should be consecutive.)
No need for good faith for funding. The application form requires you to certify, under penalty of law, that “the current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations”. If your business is unaffected by the recent turmoil in the economy, or if you have many other sources of cash, you probably won’t be able to make this statement. Recent SBA guidelines state that “any borrower who, together with its affiliates, has received PPP loans with an initial amount of less than $ 2 million will be deemed to have provided in good faith the required certification regarding the necessity of the application. loan. This appears to be a virtual waiver of the certification requirement, but intentional misrepresentation in this regard would still be inappropriate and discouraged.
THE CALCULATION OF FORGIVENESS. Suppose you do indeed qualify and receive a P3 loan in an amount equal to 2.5 times your average Schedule C income for 2019 (ignoring amounts earned over $ 100,000 in that year. ). For a business with no employees other than yourself, you should easily be able to get at least 75% off your P3 loan.
The maximum cashback amount begins with the total amount of eligible expenses you incur and pay over an 8-week period that begins on the date your loan is funded. These include the following:
- Make sure you give yourself as compensation an amount equal to your total income from Schedule C for 2019 multiplied by 8 and divided by 52, but (due to the $ 100,000 limit) no more than $ 15,385 for the whole period. This should be 75% of your total loan amount (8 weeks over 2.5 months is 56 days divided by 75 days, or 74.7%).
- If your business is paying for utilities (electricity, internet, etc.) under service contracts prior to February 15, 2020, be sure to pay for 8 weeks of utilities within the 8 week period.
- If you have business rental expenses (such as office rent or equipment lease) under leases prior to February 15, 2020, be sure to pay 8 weeks of those lease payments over the course of the 8 week period.
- If you have commercial mortgage interest or equipment loan interest under loan agreements prior to February 15, 2020, be sure to pay 8 weeks of that accrued interest within the 8 week period.
FORGIVENESS REDUCTIONS. The maximum amount of discount is then subject to complicated reductions for a reduction in staff and for a reduction of more than 25% in wage rates. But if you are the only employee and if you use the P3 loan to fund the benefits yourself, there is likely to be no downsizing or reduction in the pay rate. So consider yourself lucky here that you don’t have to learn the complex rules around forgiveness cuts.
POST-SCRIPT. If you have structured your self-employment through your own S corp or C corp, you will consider yourself to be an employee and your pay will be limited to what you have labeled (and paid payroll taxes for) as your salary. If the company has other employees as well, the PPP calculations get quite complicated quite quickly. Welcome to the realities of this emergency program. If 2.5 times the total average payroll for 2019 is an attractive amount, it will be worth learning the intricacies of PPP.