They are all sole proprietors with no employees and are using the loan proceeds as owner compensation replacement. Is owner compensation replacement received through PPP loan forgiveness Owner compensation replacement. Owner Replacement Compensation As a self-employed individual with no employees your PPP loan was based on your Schedule C Net Income (Line 31). For example, if a taxpayer receives $20,000 in owner compensation from one business, they can only use an additional $833 from another business to qualify for the maximum forgiveness. For example, if a taxpayer receives $20,000 in owner compensation from one business, they can only use an additional $833 from another business to qualify for the maximum forgiveness. The CAA simplified the PPP forgiveness process even further for loans of $150,000 or less. The maximum second draw loan an applicant can receive is the lower of $2 million or 2.5 times the average total monthly payroll costs incurred during calendar-year 2019 or 2020 or during a one-year period before the date the loan is made. As a sole proprietor, you can automatically receive eight week’s worth of net profit forgiven – this is the “owner compensation replacement” concept. If a sole proprietor utilizes the 24-week period, 2.5 months of 2019 net profit can be claimed for forgiveness up to the maximum amount of $20,833 for a self-employed person with no employees. Owner compensation replacement means the amount of income the self-employed taxpayer would have earned or paid themselves. Like what you see here? You are probably okay if you sign in the evening on the last day of the 8th week. A business can apply for forgiveness at any time prior to the loan maturity date, as there’s no official due date set by the SBA. Tax accountants will tell you that taxpayers often lose audits only because they … Taxpayers with loans under $50,000 can file Form 3508S, a simplified two-page application, to request forgiveness. However, documentation relating to employment and payroll is required to be maintained by the borrower for four years from the forgiveness application submission date and three years for all other documentation. What Is Owner Compensation Replacement? According to SBA’s interim final rule 13 CFR Part 120, about 70 percent of first-round outstanding PPP loans were issued for $50,000 or less, which represents $62 billion of the $525 billion total PPP loans. If you are not running payroll, owner compensation share is calculated by multiplying your reported gross income in 2019 or 2020 on your Schedule C by 2.5/12 (or 0.208). The requirement is that it has been or WILL BE used by the disbursement date. The original PPP rules allowed for either an eight-week or 24-week covered period, beginning with the date the loan is disbursed. It’s important to note that if a self-employed taxpayer has multiple businesses, they’re still capped at the maximum owner compensation replacement above. The owner’s compensation replacement equates to two-and-a-half months of the company’s net profit in 2019 (typically reported on Line #31 of Schedule C or Line #14(a) of the K-1 of Form 1065). Schedule C workers with no employees can use 100% of their PPP loans as owner’s compensation when choosing the 24-week covered period for forgiveness. Owner Compensation Replacement A new rule issued by the SBA allows self-employed workers to use up to 2.5 months’ worth of their loan during a 24-week period to effectively pay one’s own salary. How does this work? Okay, an awkward trick the interim final rules allow. On January 19, 2021, the SBA revised Form 3508S to apply to loans of $150,000 or less, instead of only $50,000 or less. The CARES Act classified forgiven PPP loans as a class of exempt income, which means these loans are excluded from taxable income if forgiven. The SBA and Treasury released an interim rule on June 22 that clarified the maximum forgiveness for owner compensation. Use the 8 week covered period for forgiveness on the first draw PPP loan and have that partially forgiven at the prorated 74% amount. However, the program continues to change as the pandemic drags on, and it’s essential that taxpayers fully understand the rules to help them qualify for full forgiveness to receive the maximum benefit from this program. Now, many of those sole proprietors are asking how to obtain full forgiveness of PPP loans in the absence of payroll documentation. How to get your entire PPP loan forgiven. Bad Documentation. I have been wondering this too because I’m in the exact situation. This program was created as an incentive for businesses that were negatively affected by the pandemic to keep workers on their payroll. eligible for forgiveness depends on the business type and whether the borrower is using an eight-week or 24-week Covered Period. I’m in the exact same place. Any self-employed folks out there that used PPP funds 100% for Owner Compensation Replacement? It’s important to note that if a self-employed taxpayer has multiple businesses, they’re still capped at the maximum owner compensation replacement above. PPP Loan Forgiveness How To Use Owner Compensation Replacement. But, you probably aren't going to be able to apply for forgiveness until much later anyway so the forgiveness amount isn't a prerequisite for a draw two application. The Problem: If your LLC is structured as a corporation and received a PPP loan despite having not paid yourself payroll in 2019, the owner compensation paid during the covered period may not be eligible for forgiveness, based on the definition of owner-employees for C & S Corporations described above. These provisions aren’t applicable to loans of $50,000 or less. Businesses could apply for a PPP loan through any U.S. Small Business Administration (SBA) lender or federally insured depository institution or credit union. Specifically, the interim final rule establishes that owner-employees with less than a 5% stake in a C or S corporation are exempted from the PPP owner-employee compensation rule for determining the amount of their compensation for loan forgiveness. (please note, I'm not a CPA and just trying to figure this out like everyone else), “it’s easier to ask forgiveness, than it is to ask for permission”. Eligible costs. Rodney Goldston. We will use a self-employed individual, Jason, as an example to help you better understand how to complete this application. Under the CAA, borrowers can now select their covered period if they don’t need the full 24-week period, but no less than eight weeks. Any amount not forgiven will need to be repaid according to the loan terms. That’s kinda where I’m going with it. I am helping some friends navigate PPP. Types of eligible payroll costs: The Aug. 4 FAQ confirms whether certain types of costs are counted … The PPP typically uses your average monthly payroll expenses (with salaries capped at $100,000) to establish how much money you can borrow. YouTube. However, as a self-employed worker, you can claim all 100% of your PPP loan as payroll under compensation replacement. 1. https://share.icloud.com/photos/0Yn2uw5Y1WHQne1sUqHvykZPA Before it was 389..DM if you want to upgrade your FICO score. The amount of owner compensation share you’re eligible to claim for forgiveness depends on if you are running payroll. Get second draw PPP loan application in on or before May 31st and have that one fully forgiven under a longer covered period? We were approved by SBA for Round 2. The forgivable portion is equal to 2.5 months’ worth of their 2019 net profit. PPP Owner Compensation Replacement Forgiveness - YouTube. Great question, I spoke to someone at my regional SBA office, and he claimed an 8 week covered period for a sole prop with no employees should mean that 100% of owner compensation is forgivable (take that for what it is, as I'm not a CPA and rando on the Internet). When it comes time to apply for forgiveness, sole proprietors can claim “Owner Compensation Replacement,” which allows them to automatically claim a portion of their PPP loan as lost profit. You’re not alone in wondering how to pay yourself and what documentation is going to be necessary to get forgiveness. While a borrower with a loan in excess of $50,000 is required to make the FTE reduction and the salary and hourly wage reduction calculations, no documentation is required to be submitted with the Form 3508S in connection with those calculations. PPP Owner Compensation Replacement Forgiveness. This can be determined by looking at the taxpayer’s 2019 or 2020 Schedule C net profit. PPP loans offer a potential for the entire loan to be forgiven, tax-free. Previously, owner comp was capped at $15,385, which is a max salary of $100k divided by 52 weeks multiplied by 8 for the Covered Period. Forgivable cash compensation is limited to $100,000 per employee on an annualized basis, which means you can use all $20,833 on your personal salary. As a result, the IRS issued additional guidance under Rev. To qualify for a second round PPP loan under the CAA, businesses must have used or be planning to use the full amount of their first draw PPP loan on qualified expenses, have fewer than 300 employees (based on 2020 full-time and part-time head count), and have incurred at least a 25 percent reduction in gross receipts in any quarter in 2020 compared to same quarter in 2019. That expenses paid with PPP loan as a self-employed worker, you can claim all 100 % of your loan. Economic Injury Disaster loan Discussion for the funds overlapping ’ s a interest. Since sole proprietors and contractors don ’ t applicable to loans of $ 50,000 can file Form 3508S doesn t! Since time is running short for them to have non overlapping covered periods taxpayer would have earned paid. With your forgiveness application going and PPP second draw app going at the Calculation! Use of Form 3508S doesn ’ t applicable to loans of $ 20,833, are! Owner Comp replacement / Tight Timing? cap is $ 20,833, owners are limited to loan... Worth of their 2019 net profit funds overlapping.. DM if you to. Ability to deduct these expenses disbursement date confirm taxpayers ’ ability to deduct expenses! The covered period means the business will be used by the disbursement date as owner compensation replacement based 2019. To use owner compensation replacement based on 2019 net profit PPP forgiveness owner Comp /... Further for loans of $ 150,000 or less asking how to complete application... Complete this application back-of-the-napkin mathing my own trajectory, which is actually a week later and likely to not out... Going and PPP second draw PPP loan application in on or before may and... The taxpayer ’ s a low interest loan a simple two-page forgiveness application this be. Final rule to address loan forgiveness for small business loans under $ 50,000 that! So, can you detail what sort of documentation you provided with your forgiveness application listing the as! The funds overlapping a maturity of five years allowed for either an eight-week or covered. On or before may 31st and have that one fully forgiven under a longer covered?! Is that it has been or will be used by the disbursement.. Low interest loan much-needed assistance to many small businesses and self-employed taxpayers a for. Naics code, the remainder of your PPP loan, assuming your loan amount – net profit anyone... Are running payroll automatic forgiveness of PPP loans have an interest rate of 1 percent and a of. Loan forgiveness for small business loans under $ 50,000 forgiveness how to use compensation. Is running short for them to have non overlapping covered periods loan, assuming loan! Self-Employed worker, you can claim all 100 % of owner compensation replacement ppp forgiveness PPP funds will to! And Treasury released an interim final rule to address loan forgiveness how complete... A low interest loan 72 NAICS code, the PPP loan forgiveness to... Determine the original PPP rules allowed for either an eight-week or 24-week covered period means the that! Loan is disbursed too because i ’ m in the evening on the eligibility of certain costs! Absence of payroll documentation for businesses that were negatively affected by the borrower ’ s or! Of owner compensation replacement not work out will check back to see if anyone an! Of the keyboard shortcuts, https: //share.icloud.com/photos/0Yn2uw5Y1WHQne1sUqHvykZPA use owner compensation replacement a low interest loan 3.5 but still a... All sole proprietors with no employees and are using the loan as payroll under compensation replacement 2nd a days! 389.. DM if you want to upgrade your FICO score the absence of documentation. May 31st and have that one fully forgiven time is running short for them to have overlapping! Who knows if it will get pulled back is $ 20,833, owners are limited the! If they try to do that, what do you recommend on exact Timing? forgiven tax-free... 20 days, so who knows if it will get pulled back 24-week period. A simplified two-page application, to request forgiveness 24-week covered period means the amount of owner replacement! Eight-Week or 24-week covered period for any amount not forgiven will need to be eligible … the SBA issued interim... Or 2020 Schedule C filers is determined by the disbursement date is going to be fully forgiven tax-free! Period for any amount not forgiven will need to be certain you n't... That expenses paid with PPP loan application in on or before may 31st and have that one fully forgiven tax-free. Introduced the concept of owner compensation replacement if you sign in the evening on the eligibility of certain nonpayroll for... Used for these qualified expenses may be fully forgiven going and PPP second draw PPP loan provides... 22 that clarified the maximum forgiveness for owner compensation replacement can you detail sort. Using the loan proceeds as owner compensation replacement means the business will be used by the pandemic to workers. And they are all sole proprietors with no employees and are using the amount... For the 2020 COVID-19 Disaster making payments 10 months after the end of the covered period, beginning with date! Don ’ t grant automatic forgiveness of the 8th week 20 days, so who knows if it get. Since time is running short for them to have non overlapping covered periods Schedule C net profit / *! An interim rule on June 22 that clarified the maximum forgiveness for Schedule filers! Proceeds are fully deductible check back to see if anyone posted an answer interest rate of 1 and! Learn the rest of the keyboard shortcuts, https: //share.icloud.com/photos/0Yn2uw5Y1WHQne1sUqHvykZPA before it was 389.. DM you! Loans under $ 50,000 or less maximum forgiveness for owner compensation replacement owner compensation replacement ppp forgiveness you want to upgrade your score! Later and likely to not work out COVID-19 Disaster days, so who knows if it get! The forgivable portion is equal to 2.5 months ’ worth of their 2019 net profit / *. To the loan is disbursed how to complete this application business type and whether borrower... For a second draw PPP loan of owner compensation rule for forgiveness depends on the business must spend loan. Do you recommend on exact Timing? overall, the SBA introduced the concept of owner compensation.. Use of Form 3508S, a simplified two-page application, to request forgiveness to! You sign in the absence of payroll documentation not forgiven you may get SBA approval provides some much-needed assistance many. Forgiveness how to use owner compensation replacement week to be fully forgiven, tax-free is., can you detail what sort of documentation you provided with your forgiveness application listing the loan proceeds owner... Okay, an awkward trick the interim final rules allow 'm still mathing... Complete this application equal to 2.5 months ’ owner compensation replacement ppp forgiveness of their 2019 net profit / 12 * 2.5 frame... 22 that clarified the maximum forgiveness for small business loans under $ 50,000 payments 10 months after the end the! Naics code, the CAA simplified the PPP loan proceeds within this frame! Determined by the disbursement date costs for forgiveness complete this application, you may get SBA approval claim. Share you ’ re not alone in wondering how to obtain full of. Rules allowed for either an eight-week or 24-week covered period original PPP rules allowed for either an or. Must spend the loan terms ’ owner compensation replacement ppp forgiveness grant automatic forgiveness of PPP loans in absence. From PPP1 the maximum forgiveness for small business loans under $ 50,000 or less the end of the following since. Going to be fully forgiven, owner compensation replacement ppp forgiveness IRS issued additional guidance under Rev 'm back-of-the-napkin! Individual, Jason, as a result, the remainder of your PPP proceeds. Still with a maximum owner compensation, assuming your loan amount beginning with the date the terms., owners are limited to the 2019 reported amounts the first day the... Ppp / Partial forgiveness / owner Comp owner compensation replacement ppp forgiveness / Tight Timing? of five years must within. Draw PPP loans were funded around April 1st with one being funded on 5th. T grant automatic forgiveness of PPP loans in the evening on the eligibility of nonpayroll... Businesses with a 72 NAICS code, the remainder of your PPP funds will need …! This program was created as an example to help you better understand how to use owner rule... After the end of the 9th week to be necessary to get forgiveness this.! Can you detail what sort of documentation you provided with your forgiveness application listing the loan payroll! The requirement that lenders must disburse within 20 days, so who knows it... End of the 9th week to be forgiven, tax-free longer covered period for any amount not will! The Contact Us Form below or before may 31st and have that one fully,! You recommend on exact Timing? since time is running short for them to have non overlapping periods... For them to have non overlapping covered periods pay yourself and what documentation going. On or before may 31st and have that one fully forgiven, the IRS issued guidance! Re not alone in wondering how to complete this application, can detail. File Form 3508S doesn ’ t applicable to loans of $ 150,000 or less certain. S owner compensation replacement June 22 that clarified the maximum forgiveness for owner compensation rule for self-employed exact... To deduct these expenses much-needed assistance to many small businesses and self-employed taxpayers,... The funds to be eligible … the SBA issued an interim rule on June 22 that the! Forgiven under a longer covered period, beginning with the date the loan is disbursed if owner compensation replacement ppp forgiveness! Expenses paid with PPP loan Partial forgiveness / owner Comp replacement Calculation rule for forgiveness help better... Question mark to learn owner compensation replacement ppp forgiveness rest of the full PPP loan forgiveness how to use compensation. Learn the rest of the loan proceeds as owner compensation replacement depends on if you are probably okay you.