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Payroll Protection Plan (PPP) Loan Guidance Sole Proprietorships and Independent Contractors

Posted by Admin Posted on Apr 15 2020

Who is eligible for a PPP loan for sole proprietorships and independent contractors?

  • A sole proprietorship is a business reporting income on Form 1040, Schedule C.
  • Farmers are sole proprietorships reporting income on Form 1040, Schedule F.
  • Independent contractors are sole proprietorships reporting income on either
    Form 1040, Schedule C or Form 1040, Schedule 1, Line 8, Other Income.
  • Sole proprietorships, farmers and independent contractors pay self-employment tax on their earned income.
  • An individual can have self-employment income from multiple sources.
  • Self-employed income from all sources is reported on Form 1040, Schedule SE, Line 3.
  • Individual partners in service-providing partnerships pay self-employment tax on their share of partnership’s net income.  The SBA has not yet verified if individual partners are eligible for an individual PPP loan.

 

What is the PPP loan amount for sole proprietorships and independent contractors?

  • The PPP loan amount is 2.5 times average monthly payroll costs.
  • Payroll costs are defined as net earnings from self-employment.
  • Certain adjustments apply to sole proprietorships with employees.

 

How is the PPP loan amount calculated for a sole proprietorship without employees?

  1. (1)  Determine the net earnings from self-employment reported on the 2019 Form 1040, Schedule SE, Line 3, limited to $100,000.
  2. (2)  Divide Line (1) by 12 to arrive at average monthly payroll costs.
  3. (3)  Multiple Line (2) by 2.5 to arrive at the PPP loan amount.

Income tax deductions for the sole proprietor’s 50 percent of self-employment tax, self-employed health insurance and self-employed retirement plans are not factored into self-employment earnings.

 

How is the PPP loan amount calculated for a sole proprietorship with employees?

  • Payroll costs are calculated as:
  1. (1)  Net earnings from self-employment reported on the 2019 Form 1040, Schedule SE, Line 3, limited to $100,000.
  2. (2)  Add back:
    •        Employee wages reduced by wages over $100,000 paid to any employee.
    •        Employer paid health insurance cost for employees.
    •        Employer contributions to a retirement plan for employees.
  3. (3)  The sum of Line (1) plus Line (2) equals annual payroll costs.
  4. (4)  Divide payroll costs by 12 to arrive at average monthly payroll costs.
  5. (5)  Multiply by 2.5 to arrive at the PPP loan amount.

Income tax deductions for the sole proprietor’s 50 percent of self-employment tax, self-employed health insurance and self-employed retirement plans are not factored into self-employment earnings.

 

What portion of the PPP loan is eligible for forgiveness?

  • The sole proprietorship PPP loan is eligible for forgiveness if:
    1. (1)  At least 75 percent of the loan funds are spent on payroll costs, including the portion of payroll costs equal to the net earnings from self-employment considered in the loan amount calculation.
    2. (2)  The remaining 25 percent of the loan funds are spent for payments of interest on existing mortgages, rent and utilities.
    3. (3)  The above expenditures must be paid within the eight weeks following receipt of the loan proceeds.
    4. (4)  Details are pending regarding the calculation of amounts spent for payroll costs for self-employed individuals.

 

When does the application period begin?

  • Sole proprietors and independent contractors can apply for a PPP loan at any SBA provider financial institution beginning April 10, 2020.

 

Labenz & Associates LLC Disclosure:  The information provided is general in nature based on provisions as of April 10, 2020.  Additional provisions may apply.  Please discuss the provisions with your tax advisor and SBA lender.