How is the eligible loan amount for COVID-19 Paycheck Protection Program (PPP) calculated?
Last modified 6/18/2020 8:15:50 AM EST | Added by Paywow Team

The key element that goes into the calculation of a PPP loan depends on how the business is taxed. For a business organized as a Sole Proprietorship, the eligible loan amount is based on the business’s net profit, whereas for partnership firms, it is based on the self-employment income of partners. 

Here’s the summary of how PPP loan works for different businesses. 

Calculating the loan amount for a Sole Proprietorship Firm

If your business is organized as a Sole Proprietorship, then your loan eligibility amount is solely based on the income recorded on line 31 Schedule C of your 2019 Form 1040. This indicates the net profit of your sole proprietorship. Hence, you need to include your 2019 Schedule C tax form along with your PPP loan application. 

If the income reported on Schedule C is $0 or less, then you are not eligible for a PPP loan. Please note that your employee's salary and that of yourself has to be capped at $100,000. If line 31 of Schedule C is more than $100,000, you can just take $100,000 for calculation purposes. 

Another key point to be noted here is, if you are a single-member LLC, you will be considered as a sole proprietor. This will be on similar lines to how you were taxed. 

The calculation process works in such a way that if your business was started prior to June 30, 2019, you have to divide the income amount by 12; regardless of whether the business operated for the whole year. If your business was started after June 30, 2019, you have an option to either use the 2019 income divided by 12 or the income from the months January and February and dividing it by two. 

Illustration:

Let’s assume that your business was started in February 2019, and started making profits by June. And, your business doesn’t have W2 employees as such. Also, consider that your business has an EIDL loan of $14,000.   Here’s how you should calculate:

Step I: Identify the business income amount on line 31 of 2019 Schedule C. Let’s say it is $80,000. 

Step II: Now divide $80,000 by 12 to arrive at the average monthly net income. This comes to $6,666. You need to report this number on the <Average Monthly Payroll> box. 

Step III: Multiply this amount by 2.5, and you will get $16,666. Since you have an outstanding EIDL loan amount of $14,000 add this to $16,666. You get $30,666. This is the maximum loan eligibility amount you'll be eligible for your sole proprietorship. 

Step IV: Calculating the Forgiveness of a PPP loan:

According to the CARES Act, the loan proceeds if used to cover the payroll costs and other utility costs for an 8 week period is forgiven. For instance, in this case, the sole proprietor had a maximum Schedule C income of $20,000. Hence, the automatic forgiveness would be $3,076 ( 8/52 * $20,000). 

Points to be noted: 

Though rent and utility payments are covered under this loan and qualify for forgiveness, they are not included in the initial calculation. 

Member draws don't become part of the calculation. 

Calculating the loan amount for a Partnership Firm 

Any business organized as a partnership firm with one or more partners, and with a clearly outlined ownership percentage must apply for the PPP loan as a partnership firm. The loan amount of a partnership firm solely depends on the combined self-employment income of active partners. This figure can be found on line 14 on Schedule K-1 of each partner. Make sure to cap the salary limit at $100,000.

If your partnership firm had W2 employees, it is a must to include their salary cost, state and local payroll taxes, sick pay, vacation pay, and contributions of employer health insurance benefits. Keep a note that you are capping the salaries at $100,000. Also, don't include 1099 contractors and remote workers whose residence is outside the United States. 

Illustration:

Let's presume that your partnership firm is run by yourself, and a couple of partners. And, you have been operating since 2019 with a good number of W2 employees on board. 

Step I: Identify the self-employment income found on line 14 of every partner's Schedule K-1. Let's assume that the salary of one partner is $70,000 and that of the other one is $140,000 respectively. Since there has to be a cap of $100,000 you can just consider $140,000 at $100,000. 

Step II: Since you have W2 employees, you can include the state payroll taxes, insurance costs, sick pay, vacation pay, and retirement contributions. Let's say all these make up to $100,000. When you add this, your total amount goes up to $270,000.

Step III: Since your business was operational during 2019, you need to divide the total amount by 12. This comes to $22,500. 

Step IV: Multiply the amount by 2.5, and you get $56,250. This number will be your maximum loan eligibility amount. 

Points to be noted: 

Though rent and utility payments are covered under this loan and qualify for forgiveness, they are not included in the initial calculation. 

Member draws don't become part of the calculation.