Understanding PPP Funds

The first round of stimulus during Covid included PPP loans for small businesses. PPP is short for Paycheck Protection Plan. This program was intended to help employers retain and pay employees during this pandemic. PPP funds were released to employers with less than 500 employees. Employers could only receive PPP funds for non-1099 employees. Employees had to be employed during the period specified in the loan application. The PPP loan is calculated based on the amount of payroll paid in an 8 week period during the beginning of 2020 or end of 2019.

PPP loans are special as they can be forgiven under the following guidelines:

  1. Owners/officers of the company receiving PPP funds cannot be compensated above certain thresholds. If an owner/officer receives more than $100k in compensation annually, they may have restrictions as to how much they can be approved for in PPP funds.
  2. To be eligible for forgiveness of the loan, 75%+ must be used to pay W-2 payroll employees and taxes.
  3. 25% of the loan can be forgiven if used for rent and or utilities and or transportation costs.
  4. The loan will not be forgiven if used for business expenses other than those listed above.
  5. Payroll must be run for 8 weeks following receipt of the PPP loan. Earlier PPP loans specified the 8-week period as the 8 weeks immediately following the receipt of loan funds. Recent changes to this requirement extended the time frame for running payrolls after receipt of the funds.
  6. A loan forgiveness application must be filled out after the 8-week period has elapsed in order for the loan to be forgiven. A copy of the loan forgiveness application can be found here.
  7. PPP loan funds will not be forgiven if used to pay 1099 workers. Under PPP guidelines, 1099 and self-employed workers are to apply for a sole-proprietor type PPP loan.

PPP loans should be classified for accounting purposes as other income per guidelines. PPP funds are currently not considered taxable income for a business. Any PPP funds that are not forgiven should be moved to an other current liabilities account as they will need to be repaid.

Since its inception, the PPP loan program has had hiccups and undergone a series of changes. The PPP program is still changing. Currently a blanket forgiveness is being considered for PPP loans under a specific dollar amount although this has not been approved. For further questions about the PPP loan program the SBA has set up an FAQ’s document which can be viewed here.

Sole Proprietorship

Over the next few posts we will discuss different corporate structures. Many wonder what corporate structure is right for them when owning a business. These posts will discuss each corporate structure available and when they should be utilized. In this post we will discuss Sole Proprietorship.

A Sole Proprietorship is not a legal entity as far as the state and federal government are concerned. This type of corporate structure is used often for businesses that are just beginning. If you have a side gig that earns you income. If you will only be working a small amount of hours on your business to start. If you aren’t quite sure what corporate structure you should use yet, you will probably use Sole Proprietorship.

Legalities of running a Sole Proprietorship

First you will probably want to register your business with the county you will conduct business in. This is called a DBA or “Doing Business As”. If you plan to conduct business in a name other than your own you will want to register the name you want to use. Registering your business name will enable you to operate using the business name you wish in your county.

As a Sole Proprietor you will be eligible to file a schedule C on your 1040 tax return. A schedule C is a schedule of business expenses that are deductible on your taxes. Not all expenses are tax deductible and some have certain regulations. You may also be eligible to write off vehicle expenses and business use of home.

A corporate veil is the legal protection operating a legally registered corporation provides. As a Sole Proprietor you do not have a corporate veil. If someone initiates legal action against you, your personal assets are unprotected. Only legally registered corporations offer protection of your personal assets.

If you are considering incorporation or need help with accounting or bookkeeping, please feel free to call us for a free consultation at 800-572-4419 or email [email protected]. Subscribe to our blog today for more bookkeeping, accounting and HR tips!

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