Editor’s Note: This post was originally published on Fundbox.com.
By Dan Biewener
With the passage of the Relief Bill and Government Funding Bill on December 22, 2020, the Paycheck Protection Program is back, and Fundbox can connect you with an easy process to help you get funded quickly.
Don’t let the “paycheck” in the name fool you into thinking you wouldn’t qualify for this forgivable loan. In fact, since you don’t have staff headcount, payroll, and benefits to calculate, your application process (for the loan and later for forgiveness) should be much simpler.
Even as a sole proprietor, the PPP loan can provide you with funds equivalent to your pre-pandemic net earnings over 2.5 months (or 3.5 months if your business is in the food services or accommodations industry)-based on a comparative period from 2019 (or the first 2.5 months of 2020 if your business began in 2020).
You can also use a portion of this loan to cover some operational expenses for your business (like business-related rent, utilities, or interest payments on a mortgage or other business loans, and certain business-related supplies or repairs). However, if you want to qualify for loan forgiveness, these operational expenses can only account for up to 40% of your total loan amount.
How Much Can You Expect to Borrow?
For most independent contractors, calculating your PPP borrowing limit is a 3-step process:
- Find line 31 on your 2019 IRS Form 1040 Schedule C. If the amount on Line 31 is over $100,000, write $100,000.
- Divide the amount from Step 1 by 12.
- Multiply the amount from Step 2 by 2.5 (or 3.5 if your business is in the food services or accommodation industry). For most borrowers, this will be your maximum PPP loan amount.
NOTE: If you received an EIDL loan between January 31, 2020, and April 3, 2020, you can refinance that as part of your PPP loan (minus any amount received as an EIDL grant).
Here’s how you can spend your PPP loan
- Replace your compensation (based on your 2019 income)
- Pay interest payments on a mortgage or loan (such as an auto loan) you use to perform your business*
- Make business rent payments*
- Make business utility payments*
- Make interest payments on any other debt incurred before February 15, 2020 (but such amounts are not eligible for loan forgiveness)
- Operations expenses for business software and cloud computing services and other human resources and accounting needs that facilitate business operations
- Payments to a supplier for goods that are essential to the operations of the borrower pursuant to a contract or purchase order in effect before the PPP loan is disbursed or with respect to perishable goods
- Property damage costs related to looting due to public disturbances in 2020 that are not covered by insurance or other compensation
*You must have claimed a deduction on your 2019 taxes for expenses described in 2, 3, and 4 above.
Here’s What You’ll Need to Apply for a PPP Loan
If your application is accepted by a lender, the following documentation is needed:
- Completed PPP Application Form
- Include your contact name and email address.
- Indicate your Business Type (Independent Contractors and Sole Proprietors have slightly different document requirements).
- Check Yes or No for all questions on the form.
- If you answer Yes to questions 1,2, 5, or 6, you do not qualify for a PPP loan.
- If you answer Yes to question 3 or 4, you may still qualify, but you must include an Addendum on a separate sheet explaining the details.
2. 2019 Proof of Self Income
- 2019 IRS Form 1040 Schedule C.
- Check profit noted on line 31. If line 31 shows $0 or less, you do not qualify for a PPP loan.
- Proof of health insurance payments may also be accepted (but are not required) as part of the lender’s document review and loan calculation process. For Sole Proprietors & Independent Contractors, receipts and invoices showing payments can be in your name.
3. Business Formation Date (must have the formation/established date)
- Your earliest W9, or
- Articles of Incorporation/Organization
4. Proof of ownership (with Social Security Number)
- 2019 IRS Form 1040 Schedule C that shows the business name and owner name, or
- 2018 IRS Form 1040 Schedule C may be acceptable if the primary owner provides a written statement that ownership has not changed since 2018 or detailing how the ownership has changed.
- IRS Form W9 (for Independent Contractors only).
5. Unexpired government-issued photo ID
6. Electronic Funds Transfer Information
- So the lender can deposit approved funds into your account, you may be asked to provide a bank statement (either an electronic [pdf] or scanned copy) showing both the name on the account and the account number. If the account number is misidentified, the wrong bank account will be credited.
- For independent contractors and sole proprietors, the bank statement can be in the owner’s name.
Remember: as a sole proprietor, your PPP application won’t involve payroll calculations.
- Paying others with 1099 is not considered payroll.
- Benefits you pay yourself will not be considered, so you don’t need to be calculated, including:
- Health-insurance premiums
- Contributions to retirement accounts, whether a SEP, Solo 401k or IRA.
Who Can Apply?
As a sole proprietor or independent contractor, you may be eligible for a PPP loan if all of the following are true:
- You were already in operation on February 15, 2020. (With very few exceptions, you can’t have started a business this March or April and expect to get PPP funds.)
- Your primary place of residence in the United States. (You don’t have to be a U.S. Citizen);
- Your business has filed a 2019 tax return with the IRS. For independent contractors, this means a Form 1040 Schedule C for 2019 showing self-employment income.
- Furthermore, to qualify, you must certify in good faith that the loan is “necessary to support [your] ongoing operations.” (In other words, PPP loans should be your only way of accessing needed money.)
What If You Don’t Qualify for 100% Forgiveness?
Amounts not forgiven simply convert into a 1% interest loan, payable over the next five years. There’s even a grace period. No payments would be required until the SBA remits the forgivable amount to your lender. If you do not request forgiveness, you will not have to make any payments for 10 months following the date of disbursement of the loan. (However, interest will still accrue from the date loan was disbursed.)
For this latest round of PPP funds, re-opened on December 27, 2020, Fundbox. Fundbox can connect you with an easy process to help you get funded quickly.
The information discussed in this article and podcast was collected from various external sources, and to the best of our knowledge, was correct as of December 27, 2020. This content is for informational purposes only. Fundbox and its affiliates do not provide financial, legal, or accounting advice. You should consult your own financial, legal, or accounting advisors before engaging in any transaction.
Originally published at https://fundbox.com on December 28, 2020.
