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PPP for Self-Employed

If you are self-employed, a sole proprietor or an independent contractor (1099) you may be eligible for the Payroll Protection Plan (PPP) loan forgiveness during the Coronavirus crisis, even though you have no employees.  The loan is administered by the Small Business Administration (SBA), via the Coronavirus Aid, Relief and Economic Security Act (CARES Act) with funding 349 Billion.  You must apply through your bank that maintains your business checking accounts.  You should apply for the PPP asap.  As of this writing Chase is actively accepting applications, while most other large banks are still coordinating their efforts or are already closed to new applications.

The loan amount is calculated at 2.5x your monthly payroll costs, with a cap of $100,000 for annualized payroll costs per employee.  If the proceeds are used for payroll costs, interest on mortgage, utilities and rent to help bridge the gap for the eight week period after the loan is made, the loan will be forgiven, tax-free!  Not more than 25% of the loan can be used for non-payroll costs.  The loan interest rate is 1% and principal payments are deferred for 6 months.  The loan term is 24 months and there is no personal guarantee.  In addition to compensation, payroll costs include health insurance, paid leave and retirement benefits.  Wages paid to employees who reside outside of the U.S. are excluded.  Amounts paid to contractors via form 1099 also seem to be excluded.

You will need to document your payroll costs to your lender, which will likely ask for a copy of your tax returns.  If you are self-employed as a sole-proprietor, (with no employees) you will want to include Schedule C of your Form 1040.  Line 7 of your Form 1040 will show your net income for your sole proprietorship.  Take that number and divide by 12, then multiply by 2.5.  This will give you your rough loan amount that can be applied for.  This initial information will be reviewed by the bank to make sure you qualify and additional information will likely be requested.  The bank will likely have their way of computing the loan funding amount.

After the loan is funded, the paramount issue is whether the loan will be forgiven and converted into a grant.  If you have employees, you are required to keep the same number and pay them accordingly for full forgiveness, otherwise it will be partially forgiven.  However, if you are self-employed with no employees, as long as you use the money to support yourself, your utilities, your rent, etc. the debt will be cancelled.  It is unclear if you need to show loss of income at this point or exactly how the loan forgiveness will be calculated.

For loan forgiveness, you must submit a request to your lender servicing the loan after June 30th.  You will need to substantiate how the funds were used as they were used as intended.  At this point, you should only be concerned with applying and having your tax return available with Schedule C.  You should apply if you are concerned that the current economic uncertainty makes the loan necessary to support your ongoing operations.  If you have any question, please don’t hesitate to contact your tax attorney.

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