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April 07, 2022 Post a Comment

This commodity was updated April 27, 2020 with additional guidance from Treasury.

The Paycheck Protection Plan (PPP) offers forgivable loans to business owners who use the gain primarily to maintain payroll. But there is a lot of confusion amongst small business owners who don't understand how the coin they pay themselves—such as the owner's depict or distributions—may touch their ability to qualify for PPP.

Here are just a few of the questions we've received from business owners:

We are an S Corp and in the concluding year it was just myself and my husband on the payroll. As our income is sporadic nosotros pay ourselves quarterly any nosotros tin and accept shareholder draws as we need them to embrace expenses. Should we include shareholder distributions equally part of the annual income?
I am a sole member LLC working equally a contract paralegal. Checks are written to my LLC and I in turn pay myself. How do I testify income?
My husband and I run an LLC and both own 50% of the visitor. Nosotros do non have employees or formal payroll. We don't receive bodily payroll checks merely instead but pay ourselves what is left later on the bills are paid for the month. Do we qualify for a PPP loan?

Here'southward the result. Many business owners don't pay themselves through formal payroll. Instead, they take money out of their business for their own use when they tin can. (Some even employ business funds to pay personal expenses, which is non a good practice in whatever situation.) This advertisement hoc arroyo to paying the business owner may prove problematic when it comes to qualifying for PPP.

Monitor Your Business Credit Score

Staying upwards to date on your credit score can assist yous maintain and/or achieve eligibility for future financing. Y'all get costless access to your business credit reports and scores when you sign up for a free Nav account. Checking won't hurt your credit scores.

On Apr 24, 2020 Treasury released guidelines for calculating the maximum loan amount by business entity, and nosotros are sharing that information here. Unfortunately, it was released late in the process afterward many businesses already practical. Just if you're yet considering applying for a PPP loan, it may prove helpful. Keep in mind the maximum loan amount is $x 1000000 per PPP loan, regardless of business concern entity.

Please keep in mind this information is changing rapidly and is based on our current understanding of the programs. It can and probable will change. Although nosotros will be monitoring and updating this as new information becomes bachelor, please do not rely solely on this for your financial decisions. We encourage you to consult with your lawyers, CPAs and Financial Advisors. To review your real-fourth dimension funding options with one of Nav's lending experts, please contact us.

S Corporations

When owners of S Corporations pay themselves (or other shareholders), they may pay themselves a salary, distributions (or "owner's depict") or a combination of the two. Salary payments are subject field to payroll taxes while owner'due south draws or distributions are non taxed every bit salary. Information technology's the latter that can create problems when it comes to qualifying for PPP.

Here'due south the latest guidance describing how to calculate the maximum loan amount for corporations, including Due south and C corporations:

Step 1: Compute 2019 payroll costs past adding the following:

2019 gross wages and tips paid to your employees whose main place of residence is in the Us, which can be computed using 2019 IRS Grade 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter plus any pre-taxation employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting whatsoever amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is exterior the U.South;
2019 employer health insurance contributions (portion of IRS Course 1120 line 24 or IRS Course 1120-S line 18 owing to health insurance);
2019 employer retirement contributions (IRS Form 1120 line 23 or IRS Course 1120-South line 17); and
2019 employer state and local taxes assessed on employee compensation, primarily land unemployment insurance taxation (from state quarterly wage reporting forms).

Step 2: Calculate the average monthly payroll costs (split the corporeality from Step 1 by 12).

Step 3: Multiply the average monthly payroll costs from Footstep 2 by ii.v.

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of whatsoever advance under an EIDL COVID-19 loan (because information technology does not take to be repaid).

Documentation: The corporation'south 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements), along with the filed business tax render (IRS Form 1120 or IRS 1120-S) or other documentation of any retirement and health insurance contributions, must exist provided to substantiate the applied-for PPP loan corporeality. A payroll argument or like documentation from the pay period that covered February 15, 2020 must exist provided to establish you lot were in performance and had employees on that date.

Conspicuously absent from this guidance is any instruction for South Corporation owners who pay themselves from owner'south describe or distributions. The SBA Ambassador and Treasury have non released official guidance on whether owner'due south draw counts toward the payroll calculation for purposes of qualifying for PPP. Only an email from the SBA dated Apr half dozen, 2020 states, "But payroll costs in the course of salary, wages, tips, etc. are eligible for the PPP program. Owner draws, distributions, amounts recorded on a K-ane are not eligible for the PPP program." An SBA webinar I recently attended stated the same information so it appears to be an official position of the SBA.

Sole Proprietors and Independent Contractors

Sole proprietors who don't have a formal business organization structure must report their business income and expenses when they file their personal tax returns. Most will use Schedule C to do that. The SBA recently issued guidance indicating that those who file Form 1040 Schedule C should employ information from their 2019 Schedule C to authorize. Specifically they should employ the internet profit from Line 31 of their 2019 Schedule C. (The 2019 return doesn't have to be filed only it should be completed.)

Here is the step-by-step guidance for businesses that file Schedule C with no employees (including independent contractors, but not partnerships):

Step 1: Discover your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if yous have not yet filed a 2019 return, fill information technology out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is nada or less, you are non eligible for a PPP loan.

Step two: Summate the boilerplate monthly internet profit corporeality (divide the corporeality from Stride 1 by 12).

Pace 3: Multiply the average monthly internet profit amount from Step ii past 2.5.

Stride 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) fabricated between January 31, 2020 and Apr 3, 2020 that y'all seek to refinance, less the corporeality of any advance nether an EIDL COVID-nineteen loan (because it does not have to be repaid).

Documentation: Your 2019 IRS Grade 1040 Schedule C must be provided to substantiate the applied-for PPP loan amount. You must also provide a 2019 IRS Form 1099-MISC detailing nonemployee bounty received (box 7), invoice, bank statement, or book of tape establishing you were self-employed in 2019 and a 2020 invoice, bank statement, or book of record establishing you were in performance on February fifteen, 2020.

Partnerships

Here is the Treasury guidance for calculating the maximum amount that can be borrowed for partnerships. Treasury notes that "partners' self-employment income should be included on the partnership's PPP loan application, individual partners may not apply for carve up PPP loans":

Stride 1: Compute 2019 payroll costs by adding the post-obit:

2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment of individual U.S. based general partners that are subject to self-employment taxation, computed from box 14a (reduced past whatsoever department 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties) multiplied by 0.9235* upward to $100,000 per partner (if 2019 schedules have non been filed, fill them out);
2019 gross wages and tips paid to your employees whose master place of residence is in the United States, if whatever, which tin be computed using 2019 IRS Grade 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter plus any pre-taxation employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal identify of residence is outside the U.S;
2019 employer contributions for employee health insurance, if any (portion of IRS Class 1065 line 19 attributable to health insurance);
2019 employer contributions to employee retirement plans, if any (IRS Form 1065 line xviii); and
2019 employer country and local taxes assessed on employee compensation, primarily state unemployment insurance taxation (from state quarterly wage reporting forms), if any.

Step 2: Calculate the average monthly payroll costs (divide the amount from Step i by 12).

Step 3: Multiply the boilerplate monthly payroll costs from Stride 2 by 2.5.

Stride 4: Add any outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you lot seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not take to be repaid).

Documentation: The partnership's 2019 IRS Form 1065 (including K-1s) and other relevant supporting documentation if the partnership has employees, including the 2019 IRS Class 941 and state quarterly wage unemployment insurance tax reporting class from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements) along with records of whatever retirement or health insurance contributions, must exist provided to substantiate the applied-for PPP loan amount. If the partnership has employees, a payroll statement or similar documentation from the pay period that covered February xv, 2020 must be provided to establish the partnership was in functioning and had employees on that appointment. If the partnership has no employees, an invoice, bank statement, or book of tape establishing the partnership was in performance on February 15, 2020 must instead exist provided.

* The guidance states, "This treatment follows the computation of cocky-employment tax from IRS Form 1040 Schedule SE Section A line 4 and removes the "employer" share of cocky-employment revenue enhancement, consistent with how payroll costs for employees in the partnership are determined."

LLCs

LLCs may report their business income in diverse means. Sole member LLCs typically file Schedule C and are treated as sole proprietors by the IRS. The guidance from Treasury is brief: "LLCs should follow the instructions that apply to their revenue enhancement filing situation, for case, whether they file as a sole proprietor, a partnership, or a corporation."

Nonprofits

Treasury guidance released April 24, 2020 states "the following methodology should be used to calculate the maximum corporeality that can be borrowed for eligible nonprofit organizations (eligible nonprofit religious institutions, encounter the next question):

Stride 1: Compute 2019 payroll costs by adding the following:

2019 gross wages and tips paid to your employees whose principal identify of residence is in the United States, which tin exist computed using 2019 IRS Grade 941 Taxable Medicare wages & tips (line 5c-cavalcade one) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal identify of residence is outside the U.South;
2019 employer health insurance contributions (portion of IRS Form 990 Part IX line 9 attributable to health insurance);
2019 employer retirement contributions (IRS Form 990 Role IX line 8); and
2019 employer country and local taxes assessed on employee bounty, primarily state unemployment insurance tax (from land quarterly wage reporting forms).

Step 2: Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).

Footstep three: Multiply the average monthly payroll costs from Stride two by 2.v.

Step 4: Add together the outstanding amount of any EIDL made betwixt January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of whatever advance nether an EIDL COVID-19 loan (considering it does not have to exist repaid).

Documentation: The nonprofit organization's 2019 IRS Grade 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements), forth with the filed IRS Class 990 Part IX or other documentation of any retirement and health insurance contributions, must be provided to substantiate the practical-for PPP loan corporeality. A payroll statement or similar documentation from the pay menstruation that covered February xv, 2020 must be provided to constitute yous were in performance and had employees on that date. Eligible nonprofits that practice not file an IRS Grade 990, typically those with gross receipts less than $l,000, should see the next question.

Nonprofit Religious Organizations, Veteran's Organizations and Tribal Businesses

Hither are the instructions from Treasury to summate the maximum amount that can exist borrowed for eligible nonprofit religious institutions, veterans organizations and tribal businesses:

Step 1: Compute 2019 payroll costs by adding the post-obit:

2019 gross wages and tips paid to your employees whose principal place of residence is in the Usa, which can be computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c-cavalcade 1) from each quarter plus any pre-taxation employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting any amounts paid to whatsoever individual employee in excess of $100,000 and any amounts paid to whatever employee whose principal place of residence is exterior the U.Due south;
2019 employer wellness insurance contributions; o 2019 employer retirement contributions and
2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance taxation (from state quarterly wage reporting forms).

Step 2: Summate the average monthly payroll costs (divide the corporeality from Step 1 by 12).

Stride 3: Multiply the average monthly payroll costs from Step 2 by two.v.

Step 4: Add whatsoever outstanding amount of whatsoever EIDL made between Jan 31, 2020 and April 3, 2020 that you seek to refinance, less the corporeality of any accelerate under an EIDL COVID-19 loan (because it does not accept to be repaid).

Documentation: The entity's 2019 IRS Course 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements), along with documentation of whatever retirement and health insurance contributions, must be provided to substantiate the practical-for PPP loan corporeality. A payroll argument or like documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation and had employees on that date.

Doing the Math

The bones calculation for PPP is two.5 fourth dimension average monthly payroll. Before you lot apply, make sure you sympathize what qualifies as payroll as it may include more than than simply wages. See What Does Payroll Include ? in our FAQs virtually CARES Act PPP loans.

This article was originally written on April 23, 2020 and updated on November 12, 2020.

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