As we previously blogged, Congress established the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This $669 billion-dollar loan program was designed to help businesses negatively affected by COVID-19 continue to pay their employees. Under the CARES Act, borrowers are eligible for forgiveness of funds spent during the “Covered Period” – the 24 weeks after disbursement, or until the end of the year, whichever is earlier. To be eligible for forgiveness, at least 60% of the PPP funds must be spent on payroll costs.
Sole proprietors might be wondering how this applies to them, given that they don’t have any employees to pay. Luckily, the forgiveness process is especially easy and favorable for sole proprietors. Unlike ordinary employers, whose loans were calculated based on their average payroll expenses, sole proprietors’ PPP loans were determined by calculating 2.5 times their average monthly net incomes in 2019. When it comes time to apply for forgiveness, sole proprietors can claim “Owner Compensation Replacement,” which allows them to automatically claim a portion of their PPP loan as lost profit. The forgivable portion is equal to 2.5 months’ worth of their 2019 net profit. In most cases this will be equal to the entirety of a sole proprietor’s PPPP loan (subject to a $20,833 cap). There is no requirement that this money be spent a particular way, and it is not necessary to document any payroll. However, if a sole proprietor’s loan took other expenses into account and they are unable to have 100% of their loan forgiven as Owner Compensation Replacement, they would still need to spend the remainder of their loan on approved purposes (e.g., rent, utilities, mortgage interest, etc.) in order to have their entire loan forgiven.
If you have any questions related to the Paycheck Protection Program, or any other aspect of employment law, contact Thatcher Zavaro & Mani at 301-850-1246. www.ThatcherLaw.com. Email me at [email protected].
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