Many small business owners have not applied for the PPP cash infusion because there’s a four-letter word associated with it. That four-letter word has caused many business owners to say I don’t want to play the PPP game. If you have not yet applied for your PPP cash infusion, you likely need to get your completed application to an approved SBA lender on or before August 6, 2020. Why? Because the SBA needs to approve your loan on or before August 8, 2020.
Due to COVID-19, the IRS postponed almost all tax payments until July 15th. Now—it’s time to pay. If you have the cash, you may be wondering what’s the best way to make your payments. If you don’t have the cash, you may not know what to do. We’re here to help!
If you’re self employed (independent contractors and sole proprietorships) with no employees can also apply for this (potentially) fully forgivable loan. You must spend the money within 8 weeks of receiving it and document your expenses. In this guide we will focus on how to successfully apply for and receive a fully forgivable PPP loan. This guide is broken down into three steps: application and receipt of funds, documentation and use of funds and requesting loan forgiveness (Yes, you have to request. It’s not automatic).
Many small business owners have not applied for the PPP cash infusion because there’s a four-letter word associated with it. That four-letter word has caused many business owners to say I don’t want to play the PPP game. If you have not yet applied for your PPP cash infusion, you likely need to get your completed application to an approved SBA lender on or before August 6, 2020. Why? Because the SBA needs to approve your loan on or before August 8, 2020.
How much is clarity worth?
A lot, a whole lot.
And how much is making things easier worth? Of course, it’s a lot, a whole lot, too.
We now have both the new (a) clarity and (b) easy road to Paycheck Protection Program (PPP) loan forgiveness for the self-employed with no employees. Get ready to smile.
Say thanks to the Paycheck Protection Program Flexibility Act of 2020. This new law creates a 24-week period for you to spend your PPP loan proceeds.
If you obtained your loan proceeds before June 5, you can elect to use the eight-week period to spend your PPP loan proceeds.
Here’s the big difference:
If the 24-week covered period applies, your loan forgiveness for your deemed payroll is capped at 2.5 months of your 2019 Schedule C net profit, not to exceed $20,833.
If you elect the eight-week covered period, your loan forgiveness for your deemed payroll is capped at eight weeks, not to exceed $15,385.
When you file as a Schedule C taxpayer and have no employees, your PPP loan is based on 2.5 times your 2019 Schedule C, line 31, net profit, limited to $20,833.
Here’s how the loan amount works:
Sch. C Net Profit Monthly Loan Amount
$125,000 limited to $100,000 $8,333 $20,833
$100,000 $8,333 $20,833
$75,000 $6,250 $15,625
$50,000 $4,167 $10,417
$25,000 $2,083 $5,208
Okay, you have your loan proceeds either in hand or in play at this point.
Let’s keep our eyes on the “easy road” to forgiveness. Under the new 24-week rule, you achieve 100 percent forgiveness when you pay yourself the total loan amount within 10.8 weeks of the date you received your loan proceeds. Let’s round the 10.8 to 11 weeks.
Yes, you are reading this correctly. By simply using the loan proceeds on yourself during the first 11 weeks, you achieve total forgiveness.
Note this. By using the 11 weeks, you achieve total PPP loan forgiveness without having to spend any money on rent, utilities, or interest.
According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.
Example. Ron receives his $20,833 PPP loan on May 15, 2020. He puts the money in his business checking account. During the 11 weeks beginning with May 15, 2020, Ron writes checks to himself that total $20,833. Ron can apply for $20,833 of loan forgiveness anytime after the 11th week.
Yes.
With the 11-week program described above, you don’t have to consider interest, rent, or utilities to achieve 100 percent forgiveness.
In fact, why bother? By simply using the 11 weeks, you have less paperwork and worry.
Of course, you might want to consider interest, rent, and utilities if this takes you to earlier forgiveness. To obtain full forgiveness, you could spend as little as 60 percent on payroll and the balance on interest, rent, and utilities.
Example. Jane files a Schedule C and has no employees, and on June 1, 2020, she obtains a PPP loan of $20,000. During the first eight weeks, Jane spends $12,000 on herself and $8,000 on qualified Schedule C deductible business interest, rent, and utilities. Jane can elect the eight-week period and qualify for 100 percent forgiveness.
Here are the basic PPP forgiveness requirements that apply to your 2020 Schedule C business deduction payments for interest, rent, and utilities:
Interest payments on any business mortgage obligation on real or personal property where such obligation was in place before February 15, 2020 (but not any prepayment or payment of principal).
Payments on business rent obligations on real or personal property under lease agreements in force before February 15, 2020.
Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
On page 2 of the 3508EZ instructions, you find this:
Enter any amounts paid to a self-employed individual. For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.
We may suffer from unfounded paranoia because we find the word “paid” a word to be reckoned with. But in our opinion, you should have your Schedule C business write you checks from its business account. If there’s no separate business account, make sure the business writes checks that pay your personal expenses in the amount of the deemed compensation.
If you would like to discuss this PPP forgiveness rule with us, please don’t hesitate to call us at (908) 617-0167.
The COVID-19 pandemic may create tax benefit opportunities for you and your family members.
For example, you could hire your under-age-18 children, pay them, say, $10,000 each, and they could pay zero federal income taxes. And you or your corporation, the employer, would deduct the $10,000 you paid to each of the children.
The child wins. You win. There’s more.
Let’s say you operate your business as a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, or an LLC that’s treated as a husband-wife partnership for tax purposes. Good!
That means you can hire your under-age-18 child, and the child’s wages will be completely exempt from Social Security and Medicare taxes (FICA tax) and FUTA taxes.
To be clear, the FICA tax exemption applies to the employee’s share of FICA tax that’s withheld from the employee’s paychecks and to the employer’s share of FICA tax that your business must pay over to the Feds. You have to like that!
For 2020, your under-age-18 employee-child’s standard deduction will shelter from federal income tax the first $12,400 of wages received if the child has no taxable income from other sources. No federal income taxes for this child. You have to like that too!
You can hire the under-age-18 child part-time, full-time, or whatever works for you and the child. Right now, children in this age category are probably not attending school, and the school district’s lengthy summer vacation may have already begun.
In the fall, will your under-age-18 child be attending school in person or online? You probably don’t know anything for sure at this point. But in the COVID-19 era, your under-age-18 child’s availability to work in your business may be at an all-time high.
The wages received by your child can be used to help keep the family afloat financially. If the family is not so financially stressed, your child can use some or all of the wages to fund a college savings account or make a Roth IRA contribution.
If you operate your business as an S or a C corporation, your child’s wages received from the business are subject to FICA and FUTA taxes, just like any other employee, regardless of the child’s age.
Do it! The wages received from your business are subject to FICA and FUTA taxes, just like any other employee. This is the case whether you operate your business as an unincorporated sole proprietorship, a partnership, or an LLC or as an S or a C corporation.
When you hire a child or other family member, your business deducts the wages paid.
If you operate the business as a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, an LLC that’s treated as a husband-wife partnership for tax purposes, or an S corporation, the wage expense deduction reduces (a) your individual federal taxable income, (b) your individual net self-employment income, and (c) your individual state taxable income (if applicable).
If you operate the business as a C corporation, the corporation deducts the wages paid to a child or other family member. The deductions reduce the corporation’s federal taxable income and probably the corporation’s state taxable income (if applicable).
If your business will be unprofitable this year due to the COVID-19 fallout, deductions for wages paid to a child or other family member can create or increase a net operating loss (NOL) for 2020. If so, you can carry back the 2020 NOL for up to five tax years—back to 2015. The NOL carryback can trigger a refund of income taxes paid for the carryback year. That can really help. An NOL carried back to a pre-2018 tax year can be especially helpful, because tax rates were generally higher in those days.
Keep payroll records just like you would for any other employee to document hours worked and duties performed (e.g., time sheets and job descriptions).
Issue W-2s just like you would for any other employee.
If you’re self employed (independent contractors and sole proprietorships) with no employees can also apply for this (potentially) fully forgivable loan. You must spend the money within 8 weeks of receiving it and document your expenses. In this guide we will focus on how to successfully apply for and receive a fully forgivable PPP loan. This guide is broken down into three steps: application and receipt of funds, documentation and use of funds and requesting loan forgiveness (Yes, you have to request. It’s not automatic).
