A new round of stimulus means more funding is available to small employers, even self-employeds. But, there are a few things you need to know before you apply.
The Federal government has passed a number of emergency funding programs to help small businesses. Many self-employed individuals, sole proprietors, and contractors don’t realize that much of this aid also applies to them, whether or not they have employees. This blog focuses on employers of one – those who do not have employees on staff.
Paycheck Protection Program
The most talked about assistance right now is through the Payroll Protection Program (PPP). The Consolidated Appropriations Act (CAA), signed into law on December 27, 2020, not only authorizes a second round of PPP loans it also reopens first round PPP loans. Both rounds of the PPP loan come with the ability to have the entire amount forgiven. The CAA updated the rules of forgiveness retroactively too, making it even easier to complete the forgiveness application for those receiving a PPP loan of $150,000 or less. Other important items of note: no collateral or personal guarantees are required, there are no loan fees, and payments are deferred for the first 10 months from the date the loan is funded.
PPP1: Available again starting January 11, 2021 Application Form
Under the initial round of PPP (PPP1) loans, over five million loans were provided to businesses totaling over $525B in financing. The CAA has authorized an additional $284B in funding for PPP1 loans. If a business did not apply for this loan during the first bite at the apple, it is highly recommended that they apply for the PPP1 loan now. Only one PPP1 loan is available per employer; for those who have already received a PPP1 loan, the new PPP2 loan is available (see next section) even if the individual has not yet applied for forgiveness for their PPP1 loan.
For PPP1 loans under $150,000, an employer can apply for total forgiveness of the loan by completing a one-page forgiveness application. The Small Business Administration (SBA) should have a newer, easier forgiveness form available within the next week – ask your lender to alert you when they have this available.
The PPP1 loan is easier to qualify for than the new PPP2 loan. For a PPP1 loan, the business must certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”, while the PPP2 loan requires a demonstrated loss of income.
PPP2: Available starting January 13, 2021 Application Form
A second round of PPP (PPP2) loans have been authorized under the CAA, available to any business that received a PPP1 loan and can show a decrease in revenue of 25% or more from 2019 to 2020. The business can show a reduction in revenue either by comparing their 2019 and 2020 tax forms or by comparing one quarter in 2019 to the same quarter in 2020. For the self-employed, “revenue” is considered “gross income” (see Schedule C, Line 7) plus “cost of goods sold” (see Schedule C, Line 4). Any forgiven PPP1 loan amounts are not included in gross receipts.
To apply for a PPP2 loan, the business has to attest that they have used or will use all of their PPP1 loan funds (if the business has already received forgiveness, that proof will suffice). While a business obtaining a loan under $150,000 will not need to provide loss of income documentation at the time of filing for the PPP2 loan, they will be required to provide the backup at the time they apply for loan forgiveness (or if they do not apply for forgiveness, they must provide that information to the SBA if it is requested).
Maximum Loan Amount, Per Loan
A sole proprietor qualifies for 2 ½ months of annual 2019 income under the PPP1 loan program. Those who are also eligible for the PPP2 loan program qualify for an additional 2 ½ months of income and can use either their 2019 or 2020 tax information in their calculation. (Note that for businesses with an NAICS that begins with 72, they are able to apply for 3 ½ months of income.)
To calculate the amount a self-employed individual without employees qualifies for, it will be based on Form 1040, Schedule C, Line 31.
Deadline: Apply for either loan by 3/31/2021
While the deadline is in a few months, once the funding is exhausted no additional loans will be written. During the first round of the PPP1 loans, funds were exhausted quite quickly; therefore, it is recommended that businesses file as soon as possible. These loans are provided by financial institutions, including large banks, local credit unions, online bankers, and others. A good place to start the loan application process is to search for a lender through your CPA or Financial Planner, your business or personal bank, or banks for which you have any credit cards.
CAA: Taxation Clarified
The IRS had recently announced that PPP loans that are forgiven, or that were expected to be forgiven, would be considered taxable income. The CAA reversed this interpretation, clarifying that PPP loan amounts that are forgiven are not taxable and that business expenses paid using the proceeds of a PPP loan would continue to be fully deductible for tax purposes. This applies to Federal tax filings; states may ultimately decide on a different interpretation.
Economic Injury Disaster Loan
If a business does not qualify for a PPP loan, or needs additional assistance over the amount received through the PPP program, the SBA has another loan available called the Economic Injury Disaster Loan (EIDL). The EIDL program is designed to provide economic relief to businesses that are currently experiencing a temporary loss of revenue due to coronavirus (COVID-19). Unlike the PPP loans, the EIDL is not a forgivable loan; however, terms of the EIDL are very attractive. The EIDL has a 3.75% fixed interest rate, is a 30-year loan, has no prepayment penalties or fees, and payments are deferred for the first year of the loan. Funds can be used as working capital and to pay for normal operating expenses such as health care benefits, rent, utilities, and fixed debt payments.
Grants: Available again, but to a narrower set of employers
The EIDL program includes an upfront grant for qualifying businesses, upon application for the loan - whether or not the application is approved, and whether or not an approved application is accepted by the borrower. For a self-employed individual the grant amount would be $1000. In order to qualify for the grant during this new round of funding, the business must have experienced a 30% loss of income in any 8-week period (as compared to the prior year during the same timing) and must be located in a low-income community. When applying for EIDL funds at www.sba.gov, the online application system will walk the business through a series of questions to determine if they qualify for an EIDL grant. Regardless of whether a business is eligible for the EIDL grant, their eligibility for an EIDL loan is a separate determination.
CAA: Taxation Clarified
As with PPP loans, the CAA clarified that EIDL grants are not taxable and that business expenses paid using the proceeds of an EIDL would continue to be fully deductible for tax purposes. Again, this applies to Federal tax filings; states may ultimately decide on a different interpretation.
Deadline: Apply by 12/31/2021
Since the deadline for the EIDL application is later than for the PPP loan, it would be advisable to apply for a PPP loan first (assuming the business would qualify). Then if the business needs additional funding assistance, they can look to the EIDL program. As with the PPP loan program, once EIDL funds are exhausted, the program will no longer accept applications. The SBA manages all EIDL applications, so the business will not need to search for a lender.
FFCRA – Paid Leave
Self-employed individuals are eligible for two paid leave programs available under the Families First Coronavirus Response Act (FFCRA): emergency paid sick leave (E-PSL) and paid emergency FMLA (E-FMLA).
All combined, the maximum number of days that can be paid under FFCRA is 50 days, from 4/1/2020 through 3/31/2021. “Average daily self-employment income” is net earnings from self-employment for the taxable year divided by 260 (see Schedule C, Line 31 for net earnings). The FFCRA credit would be an offset from the business’ self-employment tax, which includes Medicare and Social Security, using Form 7202.
The Bottom Line
There are a number of moving parts and qualifications for these different programs. It is advisable to work with a CPA or Financial Advisor to determine which are available to a specific self-employed individual. The rules surrounding tax-free status of proceeds and receiving tax credits for paid leave will no doubt require additional diligence when filing the business return. Hopefully, this blog has provided a starting point to initiate the conversation.
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I love numbers. I'm a math geek. I read benefits industry articles and periodicals for relaxation (but, honestly, I'm still a fun gal). I also like to share what I've learned and you'll find it all here.