Who Qualifies for First Draw PPP Money Today?

Answer—you most likely—if you file a business tax return and have not yet received any Paycheck Protection Program (PPP) monies.

But don’t wait. The money is going to run out fast and once it’s gone, so is the PPP. And the new PPP ends March 31, even if the money is not gone by then.

You qualify for the PPP if any of the following are true:

• You file your taxes on Schedule C of your tax return. Businesses that file on Schedule C include independent contractors (often called 1099 folks), single-member LLCs, proprietorships, and statutory employees such as life insurance salespeople.
• You file your taxes on Schedule F (ranchers and farmers).
• You are a general partner in a partnership, but the partnership asks for and receives the money based on your and the other partners’ combined self-employment incomes, as adjusted.
• You operate as an S corporation.
• You operate as a C corporation.
• You are the only worker in the business—and if you have employees in the business, you qualify on both your ownership worker status and your employees’ W-2 status.

Big Picture

If you qualify, you want the PPP money. It’s a tax-free infusion. It’s called a loan, but it’s not. You have to repay loans. The PPP does not have to be repaid—it’s forgiven.

Expenses paid with a PPP forgiven loan are tax deductible.

Here’s how the PPP cash infusion works for the various business entities:

Form 1040 Schedule C Business with No Employees

If you file your business taxes on Schedule C of your Form 1040, you calculate your first-draw PPP cash infusion money using the following three-step formula:

• Step 1. Go to either your 2019 or 2020 Schedule C and find your net profit on line 31. If the profit is more than $100,000, reduce it to $100,000. If you have no profit or show a loss, you are not eligible for PPP monies.
• Step 2. Divide the Step 1 profit by 12 to find your average monthly profit.
• Step 3. Multiply the Step 2 average monthly profit by 2.5.

Example. Sally shows a net 2019 profit of $72,000. Her average monthly profit is $6,000. Her PPP cash infusion is $15,000 ($72,000 ÷ 12 x 2.5).

Planning point. If Sally showed a net 2020 profit of $84,000 (versus her 2019 profit), her maximum cash infusion would be $17,500 ($84,000 ÷ 12 x 2.5). If she has not filed her 2020 tax return yet, she should fill out the 2020 Schedule C and apply now. (Remember, there’s limited money and it can run out fast.)

Planning note. The statutory employee files a Schedule C and qualifies for the PPP just as all other Schedule C filers qualify.

Two Schedule Cs. If you have two Schedule C businesses with no employees, you can file for the PPP on both, but your maximum forgiveness in total may not exceed $20,833 ($100,000 ÷ 12 x 2.5).

Form 1040 Schedule F Business with No Employees

If you file your farm or ranch business on Schedule F of your Form 1040, you calculate your first-draw PPP cash infusion money using the following three-step formula:

• Step 1. Find your 2019 or 2020 IRS Form 1040 Schedule F line 9 gross income (if you are using 2020 and you have not yet filed a 2020 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.
• Step 2. Divide the amount from Step 1 by 12 to find your average monthly gross income.
• Step 3. Multiply the average monthly gross income amount from Step 2 by 2.5.

Example. Your 2019 Schedule F gross income is $130,000. You reduce it to $100,000 and divide by 12 to find your average monthly gross income of $8,333. You then multiply the $8,333 average monthly gross income by 2.5 to find your PPP cash infusion amount of $20,833.

Partnership with No Employees

Individual partners do not qualify for the PPP monies. The PPP first draw for partnerships with no employees is at the partnership level and follows the three-step process below:

• Step 1. Add the net earnings from self-employment of the individual general partners in 2019 or 2020, as reported on IRS Form 1065 K-1, reduced by section 179 expense deductions claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, multiplied by 0.9235. If the result exceeds $100,000 for any partner, reduce the result to $100,000 for that partner.
• Step 2. Divide the amount from Step 1 by 12.
• Step 3. Multiply the amount in Step 2 by 2.5 to find your PPP cash infusion amount.

Example. Your partnership has three partners. The average annual net earnings from Step 1 totaled $246,000, and no individual partner had more than $100,000 in average annual net earnings. The average monthly amount is $20,500 ($246,000 ÷ 12). The PPP cash infusion amount for this partnership is $51,250 ($20,500 x 2.5).

S Corporation with Owner-Employee Only

The one-person S corporation with the owner as the solo employee computes its first-draw PPP infusion of monies as follows:

• Step 1. Select either 2019 or 2020 and take the sum of the gross wages paid to the owner employee from box 1 of the W-2. If the wage exceeds $100,000, reduce it to $100,000.
• Step 2. Add to the result in Step 1 any retirement contributions (line 17 of the 1120-S) and any state and local taxes assessed to the employer on employee compensation, primarily state unemployment insurance tax.
• Step 3. Divide the amount from Step 1 by 12.
• Step 4. Multiply the amount in Step 2 by 2.5 to find your PPP cash infusion amount.

Note on health insurance. Unlike the C corporation below, the health insurance for the S corporation owner employee is included in the owner’s W-2, box 1. With a higher-income W-2, this can create a lower PPP cash infusion when compared with the C corporation owner-employee.

Planning point. Most S corporation owner-employees strive for a low salary so they can save on payroll taxes. That strategy can hurt the dollar amount of the PPP cash infusion for the S corporation owner-employee.

Example. Willie operates his one-person business as an S corporation. The corporation generates a $70,000 profit, but Willie takes no salary. His PPP cash infusion is zero.

C Corporation with Owner-Employee Only

The one-person C corporation with the owner as the solo employee computes its first-draw PPP infusion of monies based on its selection of 2019 or 2020 and follows the five steps below:

• Step 1. Find the gross wages paid to the owner-employee from box 1 of the W-2. If the wage exceeds $100,000, reduce it to $100,000.
• Step 2. Add to the result in Step 1 any retirement contributions (line 23 of the Form 1120) and any state and local taxes assessed to the employer on employee compensation, primarily state unemployment insurance tax.
• Step 3. Add to Step 2 the employer-paid health, life, disability, vision, and dental insurance contributions.
• Step 4. Total the amounts from Step 3 and divide by 12.
• Step 5. Multiply the amount in Step 4 by 2.5 to find your PPP cash infusion amount.

Example. You operate your business as a C corporation. You are the only employee. The corporation pays you $100,000 in wages, contributes $25,000 to your retirement plan, pays your health insurance benefits of $18,000, and pays $350 in state unemployment insurance. Your PPP cash infusion is $29,865 ($143,350 ÷ 12 x 2.5).

Let’s Add Employees

The rules that apply to the PPP cash infusion with respect to employees are the same for businesses that report on Schedule C, Schedule F, Form 1065 (partnerships), Form 1120-S (S corporations), and Form 1120 (C corporations). Here are the nine steps you need to follow as set forth by the SBA:

• Step 1. Use IRS Form 941 and tally the taxable Medicare wages for each of the four quarters.
• Step 2. Add any pre-tax employee contributions for health insurance or other fringe benefits that are excluded from taxable Medicare wages.
• Step 3. Total Steps 1 and 2 for each employee and limit those amounts to no more than $100,000.
• Step 4. Add to the Step 3 total the employer contributions for employee group health, life, disability, vision, and dental insurance. (Note. HRA plans such as QSEHRAs, ICHRAs, and 105 HRA plans qualify as payroll additions for obtaining PPP funds.)
• Step 5. Add to the Step 4 total the employer contributions to employee retirement plans.
• Step 6. Add to the Step 5 running total the employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax.
• Step 7. Using the grand total that you now have in Step 6, calculate the average monthly payroll costs by dividing the total by 12.
• Step 8. Multiply the average monthly payroll costs by 2.5 and you have the employee portion of the PPP cash infusion.
• Step 9. Add the results from Step 8 to the result you get for the owner or owners, and you have the total PPP cash infusion amount.

Takeaways

If you qualify for the first-draw PPP money, complete your application now. The money is going to run out fast and

once gone so is the PPP. Legislatively, the new round for the PPP ends on March 31. The clock ticks. Don’t procrastinate.

You qualify for the PPP if you

• file your taxes on Schedule C of your tax return. Businesses that file on Schedule C include independent contractors (often called 1099 folks), single-member LLCs, proprietorships, and statutory employees, such as life insurance salespeople.
• file your taxes on Schedule F (ranchers and farmers).
• are a general partner in a partnership, but the partnership asks for and receives the money based on your and the other partners’ combined self-employment incomes, as adjusted.
• operate as an S corporation.
• operate as a C corporation.
• are the only worker in the business.
• have employees whom you pay on a W-2.

If you qualify, you want the PPP. It’s a tax-free infusion. It’s called a loan, but it’s not. You have to repay loans. The PPP does not have to be repaid—it’s forgiven.

Expenses paid with a PPP forgiven loan are tax deductible.

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