So many client questions about the PPP loan program, we thought we would share some of the answers to the questions we've fielded over the past week. This post assumes you are very familiar with the PPP program, but fuzzy on how to apply the details or interpret it with your own business' structure.
Most of our clients' confusion relates to their own ability to get a PPP loan and loan forgiveness on that amount. So let us summarize briefly:
How are S Corporations treated under the Payroll Protection Program?
If you are an S Corporation owner and have been paying yourself a reasonable salary through payroll you would apply for a PPP based on your average monthly W2 salary times 2.5.
Distributions or dividends from a corporation are not considered to be a salary or self-employment income.
Also payments made to contractors aren't considered payroll and aren't eligible under the PPP.
How do 1065 Partnerships apply for the Paycheck Protection Program?
If you are a 1065 partnership (you receive a K-1), each partner would apply to the Paycheck Protection Program similar to a sole proprietor using your net income to calculate your loan amount.
Use your total net income payment for 2019 (not to exceed $100k) and divide that by 12. You take that amount and multiple it by 2.5, and that is your loan payment amount. Whether 1065 partners will qualify to receive forgiveness of their K-1 distributions under the PPP program is still being debated by legal scholars and CPAs alike. BLG believes these amounts (under $100k) will be treated as compensation that will be forgivable as "payroll", but more guidance is needed for a definitive position.
Sole proprietors and the PPP
If you are a sole proprietor and report your income through a Schedule C your salary is determined by your net profit. If you were operational in 2019 and have filed your 2019 taxes, this will be reported on line 31 of your Schedule C. If you have yet to file your 2019 taxes, but have bookkeeping for your business through 2019, this will be the Net Profit line on your income statement.
Your monthly average payroll expense will be your annual net profit divided by 12. If your annual net profit is over $100,000, you may only claim up to $100,000 divided by 12. Your loan amount will be that amount times 2.5.
Sole proprietors who are Married
If you run a sole proprietorship with a spouse, you will only apply to the PPP once, and your spouse would not be considered to have a salary through the business unless he or she was paid as a contractor prior to February 15, 2020.
If you own more than one sole proprietorship, you have to apply separately for each. But only if these sole proprietorships have separate EINs and existed before February 15, 2020. You can apply separately for as many businesses you own that have separate identification numbers, or separate tax reportings. You may apply for the PPP once with your SSN as a sole proprietor, and then separately for any other businesses you own using their EINs.
How do Independent Contractors (1099) apply for the PPP?
If you work as an independent contractor you are by default considered to be a sole proprietor in the eyes of the IRS. This means your income is reported on the Schedule C of your 1040, and you will use your 1099-MISC to determine your salary and loan amount.
You would divide your net salary (anything below $100,000) by 12 and multiply that number by 2.5 to get your loan amount. Remember to use your net salary, meaning income after expenses.