Chris Jones, EA
Don't count on total PPP loan forgiveness if you do not have employees on payroll.
If your business does not have any employees, the forgiven portion of your Payroll Protection Program (PPP) loan will likely be calculated as a formula. This means that sole proprietors and partnerships without payroll will have to repay some of their loan.
The moral of this story is that you should NOT exhaust your PPP loan funds if your business isn't able to make the payments on the loan in the future. Keep reading to see how to calculate the amount that WILL NOT be forgiven from your PPP loan.
Our prior post mentioned the forgiveness calculation is murky for sole proprietors or partnerships without payroll. The SBA hasn't updated their guidance for this situation, so here's how this will likely play out for you:
Your bank should have issued your loan based on Line 31 of your 2019 Schedule C, which is the net profit (taxable income) from your business using this formula:
Divide the net profit by 12 to get the average monthly net profit amount. Note: The maximum amount is $100,000. If your net profit was over $100,000, use $100,000 as your net profit.
Multiply the average monthly net profit by 2.5. This is the loan amount, based on 2.5 months of your 2019 average profit.
The forgiveness calculation is based on eight weeks. The assumption is the banks will use the same 2019 Schedule C net profit since 2020 taxable income won't be available until the end of the year. Here's what you should expect:
Multiply your 2019 Schedule C Line 31 (net profit) amount by 8.
Divide this amount by 52. This is the forgiven amount.
For example, let's assume Line 31 from Schedule C on your 2019 tax return is $130,000:
Reduce your Line 31 amount to $100,000.
Divide the 2019 net profit by 12: $100,000/12 = $8,333
Multiply the average monthly profit by 2.5: $8,333 * 2.5 = $20,833
Your PPP loan will be $20,833
The forgiven portion of this PPP loan will be:
Multiply the 2019 net profit by 8, then divide by 52: ($100,000*8)/52 = $15,384
The forgiven portion will be $15,384
The portion not forgiven will need to be paid back over two back, after a six-month deferral period, at a 1% interest rate.
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