Feds provide additional PPP guidance for self-employed
Earlier this week, the US Treasury clarified that a partnership seeking a Paycheck Protection Program (PPP) loan can report the income of general active partners – up to $100,000 annualized – on their application.
Initially, there was confusion over whether partners should submit a separate PPP loan application, causing many partnerships not to include partner income in their submission.
Unfortunately, if Congress doesn’t authorize additional money to the Small Business Administration to allow banks to continue writing loans, it may be too late to apply using newly issued guidance.
But there is still good news: Even if partner compensation was not part of the PPP loan your partnership received, it could still count toward loan forgiveness.
Additional guidance for Individual with Self-Employment Income who File a Form 1040, Schedule C
Similar to partnerships, individuals can include their self-employment income, net profit reported on 2019 Form 1040 Schedule C, line 31, in payroll costs for determining their total PPP loan eligibility. The total amount of annual self-employment income for purposes of computing payroll costs is limited to $100,000 – which equals a total loan amount of $20,833.
- Loan calculation: Take the lesser of your income or $100,000, divide by 12, and multiply by 2.5. For example: $100,000/12 = 8,333 X 2.5 = $20,833.
The recent Treasury guidance also provided direction on how the government will determine forgiveness for self-employed individuals.
Owner compensation replacement, the payroll cost amount for the individual with self-employment income, will be calculated based on eight weeks (8/52) of your 2019 net profit, as reported on 2019 Form 1040 Schedule C, line 31.
- PPP loan forgiveness calculation for owner compensation replacement: Take the lesser for your net profit or $100,000, divide it by 52 (for the weeks in a year) and multiply by eight (for the eight weeks of income). For example: $100,000/52 = $1,923 X 8 = $15,385.
Additional forgiveness for allowed expenses
In addition to payroll costs, a portion of PPP loan funds spent on the following expenses are also forgivable:
- Payments of interest on a mortgage obligation.
You must have claimed — or be entitled to claim — a deduction for such expenses on your 2019 Form 1040 Schedule C for them to count toward PPP loan forgiveness. For self-employed individuals with a home office, you apply the percentage used for your home office deduction to determine allocable mortgage interest, rent and utilities.
Non-payroll costs are limited to 25 percent of the total forgiveness allowed. Many businesses will have non-payroll costs in excess of the 25 percent of the loan which is a permissible use of PPP loan proceeds but will not count towards the total amount forgiven.
Using the above example, if your 2019 net profit was more than $100,000 and you received the maximum $20,833 loan, forgiveness would be computed as follow:
- The amount forgiven as owner compensation replacement would be $15,385 ($100,000 / 52 X 8)
- The amount forgiven as non-payroll expenses would be limited to $5,128.
- The amount eligible for forgiveness can be computed as total payroll costs divided by 75 percent, limited to the total PPP loan. $15,385 / 75 percent = $20,513
- This amount less the amount of payroll costs will result in the maximum amount that can be forgiven for non-payroll costs. $20,513 – 15,385 = $5,128
- Assuming non-payroll costs are at least $5,128, the total amount of the PPP loan that will require repayment will be $320. (The $20,833 loan – $15,385 owner compensation replacement – $5,128 maximum non-payroll costs = $320.)
Note: Any portion of the PPP loan not forgiven results in a 1 percent loan payable within two years of the original disbursement. You can defer the payment of principal and interest for six months; however, interest will accrue during this period.
- For all the US Treasury guidance on PPP and all the assistance available under the CARES Act, go to https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
- For the latest Treasury guidance on PPP and small businesses, the self-employed and partnerships, go to https://home.treasury.gov/system/files/136/Interim-Final-Rule-Additional-Eligibility-Criteria-and-Requirements-for-Certain-Pledges-of-Loans.pdf
As guideline refinements and clarifications continue, you’ll want to talk with your CPA to make sure you are maximizing both how much of a PPP loan you can get as well as loan forgiveness. I advise you to keep the loan in a separate account to track its use and make calculating the loan forgiveness easier.
The Boyer & Ritter team is keeping track of the latest information and guidance. We’re here to work with you and your company to ensure you get the full benefits provided by the CARES Act and any other changes made by federal or state governments during and after the coronavirus pandemic.
Benjamin R. Bostic, CPA, is a manager at Boyer & Ritter with experience providing tax and accounting services for closely-held businesses, individuals, not-for-profit organizations. Reach Ben at 717-264-7456 or firstname.lastname@example.org