Mehanna CPAs & Advisors | 199a deduction

PPP2 For The Self-Employed

The list of things to break down from the Consolidated Appropriations Act 2021 doesn’t seem to be running out anytime soon. In this article, we will be discussing how the PPP2 will affect the Self-employed. But before going into the particulars, let’s determine how first-time and second-time borrowers can qualify.

 

Am I qualified?

You are a sole proprietor when:

·       You filed or will file a Form 1040 Schedule C for 2020

·       Your principal place of residence is in the United States

·       You must have had a net profit for the time in question

If you are a partnership, you can apply for PPP but you should not submit a separate application for yourself as an individual Instead, you’ll file a single application for the company with each partner’s income reported as a payroll expense.

For first time borrowers, the IRS has identified new businesses who previously could not claim the PPP.

·       501(c)(3) nonprofit

·       501(c)(6) organization

·       501(c)(19) veterans organization

·       Housing cooperative

·       Tribal Business

 

In order to be eligible for the second application,

·       The business should employ no more than 300 employees per physical location;

·       The business has used, or will use the full amount of its first PPP loan; and

·       The business has experienced at least a 25% reduction in quarterly revenues in at least one quarter of 2020, as compared to the same quarter of 2019.

 

How to calculate your loan

For sole proprietors, the loan amount is calculated based on the 2019 net income divided by 12 to get the average net income, which then will be multiplied by 2.5, subject to the maximum amount of 20,833.

Self-employed individuals, those who don’t have employees, can claim their loan through the Owner Compensation Replacement (OCR).

 

Owner Compensation Replacement (OCR)

Because self-employed individuals don’t pay payroll to themselves, they obviously won’t have payroll costs. Instead, their loan amount will be based on their net income.

The maximum PPP loan a sole proprietor can receive is based on an annualized salary of $100,000 which caps the loan amount at the lesser of $20,833, or net income multiplied by 2.5/12. This cap applies to all businesses the individual owns. For example, if in business A, the individual gains $10,000, then the maximum amount available for the other businesses should not exceed $10,833.

Another factor the business owner should take note of is the covered period. If he files for the loan before June 5, he can choose the cover period to be 8 or 24 weeks. If the loan was taken after June 5, the 24 weeks is automatic. This is important because if the 8 weeks apply to them, the maximum amount they can claim is limited to $15,385.

Finally, if the business is new and they don’t have a schedule C filed, they can use the net profit from January to February to determine their net income. They would need to file that Schedule C using the net income from January to February and that amount will be capped at $16,667 ($100,000 / 12 x 2).

 

How to apply for forgiveness

For first time borrowers, it’s important to remember that in applying for the loan, you won’t be going directly to the SBA, rather, PPP loan applications are submitted to the lenders such as banks and lending institutions qualified as SBA lenders.

The loan you acquire should be used to cover forgivable expenses which could include the following:

·       Payroll costs

·       Mortgage interest

·       Rent

·       Utilities

·       Software

·       Property damage from civil unrest

·       Necessary supplier costs

·       COVID-related protective measures

The loan proceeds should be spent within the covered period of 8 or 24 weeks according to the choice of the borrower. Lastly, in order to qualify for forgiveness, your FTE count and payroll should not decrease after receiving your funds.

 

Benefits and Drawbacks

One of the benefits of this program is that the tax-free loan forgiveness has now been codified to be tax-deductible. There has been a long debate about the tax treatment of the expenses covered by the PPP loan and it has finally been settled by the Consolidated Appropriation Act of 2021 passed last December 2020.  

On the other hand, you also need to consider that the PPP is not compatible with unemployment benefits. This means that if you have applied for the PPP loan, you have to go to your unemployment agency and tell them you are not qualified to receive the unemployment benefit. However, once the PPP period is over, you can go back to collecting the unemployment funds.

 

Tips and Notes

What to do if you started your business after June 30, 2019

According to the IRS, regardless if you filed a 2019 tax return, you must provide the 2019 Form 1040 Schedule C with your PPP loan. If your business is not operational prior to June 30, 2019, you don’t need to file a schedule c for the year, what you need to do is fill out a Schedule C for the months of January to February 2020. The purpose of this is to assess how your business did prior to the start of the pandemic.

Application process of sole who is married

For spouses who have a business together, your spouse will not be considered to have a salary through your business. The exception is when prior to Feb 15 2020 she has been classified as a contractor.

Application process as a sole proprietor with more than one business

You may apply separately for each business that you own. For this to apply, each business should have a separate EIN Employer Identification Number, if you don’t you won’t be able to apply for it separately. In this scenario, you can apply for one business using your Social Security Number and the other with a separate EIN. Consult with your accountant on this matter.

Owner Compensation is capped at 20% of 2019 compensation or $20,833 per individual, whichever is less

List of documents to provide when you apply for a PPP loan

Finally, here are some documents you might consider to have handy during the application:

1.     Completed PPP Application form

2.     Average monthly payroll costs (applies to businesses with employees)

3.     2019 proof of payroll cost or self-income

4.     Proof of ownership

5.     Email addresses for all owners with 20% or more business interest

6.     Electronic fund transfer information

7.     Proof of business operation and active status with the Secretary of State

8.     Government-issued Driver’s License or Passport for all owners of 20% of the business

 

As the year progresses, more guidelines will be coming out and new legislation could be passed. Follow us to stay up-to-date with any news from the world of finance.

 

 

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