Are you a self employed person, sole proprietor or independent contractor who has questions about the CARES Act Paycheck Protection Program (PPP) or PPP Flexibility Act?
You’re not alone!
Most of the information published about the recent economic stimulus legislation and related guidance from the Small Business Administration (SBA) and Treasury Department focuses on businesses that have employees. There’s very little that answers the questions — or addresses the concerns — of people like you.
Here are some answers to the most common questions we’ve received from self employed people, sole proprietors and independent contractors about the PPP and Flexibility Act.
What is the Paycheck Protection Program?
It’s a loan-based economic stimulus program that‘s part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act was passed by the Senate and House, and signed into law by President Trump, in March 2020.
The PPP program was originally a $350-billion initiative created to provide small businesses with eight weeks of financial support through 100 percent federally guaranteed loans. The loans are backed by — and administered through — the Small Business Administration.
The PPP funds can be forgiven if they are spent within a specified timeframe (the eight week period know as the “forgiveness period”) on allowable expenses including health insurance premiums, utility payments, rent on lease agreements and business mortgage interest (although there are far fewer requirements for loans made to single person businesses than for larger organizations.)
The purpose of the PPP is to provide funds for small business owners to keep people employed by covering payroll costs through the COVID-19 economic crisis. This includes self employed individuals and independent contractors, who were hard hit by the pandemic.
The program was then expanded by the Paycheck Protection Program and Health Care Enhancement Act in April 2020. It added $310 billion in funding because the original PPP loan allocation quickly ran out.
What is the Paycheck Protection Program Flexibility Act?
The PPP Flexibility Act was recently passed by Congress and signed into law by President Trump. It softens many of the regulations and timeframes in the original PPP legislation. Many business owners found them onerous, so the new act extended many of the deadlines and provided more flexibility around how money from the loan program can be used. The Flexibility Act is particularly good news for sole proprietors, independent contractors and other one-person businesses. It makes it much easier for them to get loan forgiveness. It might encourage more to apply for PPP loans.
As a self employed person, how do I know if I qualify for a paycheck protection program loan?
According to the SBA, you are likely eligible if:
- Your business was in operation on February 15, 2020.
- You are an individual person with self-employment income (such as a sole proprietor or independent contractor).
- You live and do business primarily in the United States.
- You filed, or will file, a Form 1040 Schedule C for 2019.
What if my business ran at a loss last year?
If your 2019 Form 1040 Schedule C shows a loss, your business will not qualify for a PPP loan.
What if I haven’t filed my 2019 tax return?
According to the SBA, you don’t have to file your 2019 tax return before you apply for a PPP loan. However, you will have to fill it out because you will need information from it to apply for your loan. If you haven’t filed your taxes, and you plan to apply for a PPP loan, you should fill out your tax return right away and file it as you complete your PPP loan application. Make sure everything is as accurate as possible. If you have questions, check with a business tax expert or your loan provider.
How large a PPP loan will I qualify for?
For a standard PPP loan, the amount a typical. business qualifies for is based on average payroll expenses. However, as a sole proprietor or independent contractor, you don’t have a payroll. To calculate your maximum loan amount, take your 2019 net profit (or total income up to $100,000) and divide it by 12. This is your monthly average net profit or income. Then multiply your monthly net profit or income by 2.5. This is your maximum PPP loan amount. To put it another way, your PPP loan is roughly ten weeks worth of 2019 average weekly net profit or income.
A simple example
- You filed your Form 1040 and Schedule C for 2019.
- You reported $36,000 in net income.
- Take the $36,000 and divide it by 12, which equals $3,000 (your personal average monthly payroll).
- Your maximum loan amount is $3,000 times 2.5 or $7,500.
Are there limits to the size of a PPP loan?
The PPP limits total annual net earnings to $100,000. For sole proprietors, independent contractors or other one person operations, the maximum possible PPP loan is $20,833.
How many PPP loans can I take out?
You are allowed only one PPP loan.
I wasn’t in business for all of 2019. Do I still need a Schedule C?
Yes, you will need to provide a Schedule C, along with documentation (such as a bank statement ot other bank account records) that help show the period of time it covers. This will support your claim for not dividing the income on your Schedule C by 12 to come up with your average monthly income. Instead, you’ll want to show why you’re dividing it by the number of months you were in business.
I have a 2019 Schedule C, but prefer to use my 2020 financials to apply for a PPP loan. Can I do that?
No, the Treasury Department has issued a ruling that if you filed a Schedule C for 2019, you must use it when applying for a PPP loan.
Where can I apply for a PPP loan?
You can submit your PPP loan application through any loan provider approved for the program by the SBA. If your bank participates in the program, it could be a good idea to work through them because they know you and your business. Otherwise, look for a loan provider that has experience working with sole proprietorships and other single person businesses.
Do I need to put up any collateral for PPP loans?
No collateral is required.
Do I need to personally guarantee a PPP loan?
No. There is no personal guarantee requirement. The loans are 100 percent guaranteed by the SBA. However, if the proceeds are used for fraudulent or illegal purposes, the United States government could pursue criminal charges against you.
What else do I need to know about completing a PPP loan application?
When you apply for your PPP loan, you need to certify several things in good faith, including:
- Current economic conditions make the loan necessary to support your ongoing operations.
- You have not — and will not — receive another PPP loan.
- All the information you provide in your application and in all supporting documents and forms is true and accurate. If you make false statements to get a PPP loan, it could be punishable under the law.
- The tax documents you submit with your loan application are identical to those you submitted (or will submit) through the IRS.
You will be required to agree that your lender will calculate your final loan amount based on the tax documents you submit with your PPP loan application. You will also need to agree that your lender is allowed to share your tax information with the SBA’s authorized representatives, including the SBA Office of Inspector General, to ensure compliance with SBA loan program rules and for SBA loan review processes.
Your loan provider can help guide you through the PPP loan application process and answer any questions you may have about it.
Can I apply for a PPP loan if I already have an economic injury disaster loan (EIDL)?
Yes, you can. However, you are not allowed to use funds from your PPP and EIDL loans to cover the same things. If you’re not sure about how to use money from both of these programs, check with your loan provider.
When will I receive PPP funds?
Once a loan is approved, the program requires that your loan disbursement be deposited into your bank account within 10 days.
What is PPP loan forgiveness?
The forgivable part of your loan is the amount of loan money you do not have to pay back if you spend it within a certain amount of time following rules set by the original PPP loan regulations and subsequent PPP Flexibility Act updates. Recent changes to the program and guidance from the SBA have cut back on those rules for single person businesses.
How do I qualify for loan forgiveness?
This is much simpler for single person businesses than for organizations with a larger number of employees. Instead of having to spend the majority of your loan proceeds on payroll (75 percent according to the original PPP loan program and adjusted down to 60 percent by the PPP Flexibility Act), you can automatically get 2.5 month’s worth of net profit or average monthly income forgiven. This is known as owner compensation replacement. It makes things relatively simple. There was some doubt about this as outlined by the original PPP documentation, but it has been clarified by subsequent advice from the SBA that was released after the PPP Flexibility Act was passed. Check with your loan provider to find out for sure.
Do I need any documentation to qualify for loan forgiveness?
Prior to the PPP Flexibility Act and subsequent advice provided by the SBA, there was a chance that single person businesses might need to claim things like utility payments, rent, and mortgage interest to qualify for full loan forgiveness. However, because of changes made by the Flexibility Act, it’s likely that you’ll only need your 2019 Schedule C to qualify for full forgiveness. This is a situation that could change, so check with your loan provider when you apply for forgiveness.
How can I request loan forgiveness?
You submit a forgiveness application to your PPP loan provider. They can help guide you through the process. Your lender must confirm to you that your loan is forgiven within 60 days or provide information on why it is not.
What if I don’t get my loan forgiven?
Most sole proprietors and independent contractors will likely get their loans forgiven based on the changes made by the PPP Flexibility Act and subsequent SBA rulings. If for some reason your loan is not forgiven, you can repay it based on the latest PPP loan terms. The PPP Flexibility Act has extended the term of PPP loans to five years (from two) at a one percent interest rate. There is no prepayment penalty.
What if I have additional questions about PPP loans?
Check out the frequently asked questions (FAQs) section of the SBA website or contact your PPP loan provider.