Though the Paycheck Protection Program (PPP) is primarily designed to help smaller businesses retain their workforces and help with expenses, sole proprietors are also taught in program.
While most of the same qualifications apply to sole proprietors and self-employed as larger businesses, there are particular provisions for individuals who are the entirety of the company and do not compensate themselves through payroll.
These individuals will want to be conscious of the dog owner compensation replacement provision and how to use it.
What Is Owner Compensation Replacement?
The Owner Compensation Replacement rule permits the self-employed to claim some of the PPP funds as personal compensation while still receiving forgiveness for the loan.
The PPP typically uses your average monthly payroll expenses (with salaries limited to $100,000) to establish how much money you are able to borrow. That number is usually multiplied by 2.5–there are exceptions–to get your total maximum loan amount, that is capped at $10 million for the first draw, and as much as $2 million for the second.
This isn’t very helpful for sole proprietors because they don’t have any employees, nor do they compensate themselves through payroll. Instead, your 2022 net gain is used to determine your monthly average net profit. The dog owner Compensation Replacement rule enables you to allocate 2.5 months’ price of net profit to non-public compensation.
This amount is considered forgivable, meaning you won’t be expected to pay for it back. Even better, there are no restrictions on how the different options are that portion of your funds.
How To Calculate & Claim Your Owner Compensation
To claim your Owner Compensation Replacement, you’ll follow the majority of the same steps that generally apply to sole proprietorships that are seeking PPP funds.
First, you’ll need your 2022 net profits (line 31 of Schedule C). In the event that amount has ended $100,000, reduce it to $100,00. Divide that quantity by 12 to get your average monthly net gain. After you have time, multiply it by 2.5. The dpi represents both maximum PPP loan amount you will get and also the maximum amount you are able to claim as Owner Compensation Replacement. Yes, you are able to claim your entire PPP loan as Owner Compensation Replacement. All the money that may be claimed by doing this, assuming you’ve hit the $100,000 cap, is $20,833.
So let’s say you made $62,000 in net profit in 2022. Your maximum Owner Compensation Replacement could be $12,916: ($62,000/12) x 2.5.
If you don’t have a Schedule C for 2022, you may also make use of your net profits from January and February of 2022. You need to be aware that this effectively lowers the maximum amount you are able to be eligible for a to $16,667. Businesses that formed that point on aren’t currently eligible for PPP.
There’s one more wrinkle that applies only to sole proprietors who received a PPP loan before June 5, 2022. When you purchase an eight-week rather than a 24-week coverage period, your maximum amount borrowed is $15,385. All PPP loans made after June 5, 2022 automatically have a 24-week coverage period.
Claiming your Owner Compensation Replacement doesn’t require any special actions. When you file your Form 3508EZ, you’ll enter the amount you are claiming on Line 1, Payroll Costs. That’s it.
PPP Loan Owner Compensation FAQs
Who's considered the owner for PPP loans?
For purposes of the Owner Compensation Replacement clause, anybody who files an application 1040 Schedule C or Schedule F can claim it. More broadly speaking, the SBA considers an owner to become someone with a 5% or greater ownership stake in the company, but that won’t necessarily qualify you for OCR.
Is Owner Compensation Replacement taxable?
Any amount forgiven via Owner Compensation Replacement is not considered taxable. You can even deduct business expenses that you simply pay by using this money.
Can one get unemployment and PPP at the same time?
Receiving PPP may conflict with any unemployment benefits you will get. You need to report anything you obtain through PPP to your state to avoid risking any penalties or charges of fraud.
Note that you could stop collecting UI during your PPP coverage period after which resume once the period ends.
What documents are essential for PPP forgiveness to get my compensation forgiven?
If you’re a sole proprietor, then chances are you can get away with filing a Form 3508EZ, which is the shorter, simpler PPP forgiveness form. When you may not need them, it’s a good idea to keep payroll documentation, bank statements, account statements, tax forms, receipts, and then any other records of methods PPP money was spent in case they’re called for.
Do you know the other rules from PPP forgiveness?
While the Owner Compensation Replacement rules are pretty straightforward, there are quite a few rules governing PPP loan forgiveness generally speaking. You can read about those in-depth in our PPP Forgiveness Guide: Qualified Expenses, Forgiveness Rules, & How To Apply.
More About PPP Loans
The PPP is an extremely popular and, it appears, constantly evolving program. We’ve managed to get our pursuit to provide you with the most up-to-date information on the PPP and other COVID-related relief programs. If you’re just looking into PPP for the first time, check out our Round 2 PPP Loans Explained: Rules Requirements, & Where To Apply feature to get started.
