This is the fourth in a series of Law in the Marketplace columns with practical tips on how to use federal and New Hampshire laws and orders to deal with the COVID-19 pandemic.

On March 27, Congress appropriated $2.2 trillion under a federal statute known as the CARES Act to address the horrific economic impact of the pandemic. For most small businesses, the single most important provisions in that statute were, by a substantial margin, those establishing a program called the “Paycheck Protection Program” (PPP) and making $349 billion dollars available to PPP applicants.

In essence, the PPP permits owners of small businesses who believe that their businesses will be negatively impacted by the coronavirus pandemic to apply for substantial “forgivable” loans from the federal government through their banks to cover paychecks for their employees and certain related expenses.

For obvious reasons, the PPP has been enormously popular, and its initial funding was quickly exhausted. However, this Thursday, Congress appropriated an additional amount, exceeding $342 billion, for PPP loans.

A basic PPP question is whether individuals doing business as sole proprietors or independent contractors who have no employees except themselves and who do not receive employee paychecks in any normal sense of the term may nevertheless be eligible for a PPP loan. In New Hampshire alone, there are unquestionably many thousands or even tens of thousands of such individuals, including thousands of individuals who do business through single-member LLCs that accept the default federal tax regimen of sole proprietor tax.

The answer to the above question is a resounding yes. If you a sole proprietor and your business became operational by Feb. 15, 2019, you are eligible for a PPP loan. Here are the main things you should know about these loans in addition to what I’ve already stated above:

■In my own experience and that of my clients, completing and submitting a PPP application is a quick and easy process.

■To compute the PPP loan amount available to you through your application, divide your annual income up to $100,000 for 2019 by twelve and multiply the resulting number by 2.5. Thus, for example, if your 2019 annual net income as a sole proprietor was $100,000, one-twelfth of that amount is $8,333 and 2.5 times $8,333 is $20,833 —the amount of your PPP loan (rounded down by the SBA to $20,800).

■ Upon approving your application, your PPP lender – as noted, a bank or the SBA – will require documentation before granting you your loan. This may include, for example, photocopies of your driver’s license and of the Schedule C to your federal return.

■After your bank or the SBA lends you the above amount, you should pay yourself at least 75% of the loan amount during the eight-week period following the date of loan origination as your “paycheck,” thus largely exhausting your loan.

■You may use to 25% of the loan proceeds for certain business expenses, including rent, mortgage interest, utilities, internet and transportation costs.

■At some point after you’ve exhausted your PPP loan, you will be required to prove with documentation that you used your loan amount solely for PPP permissible business expenses, of which at least 75% must be compensation to yourself.

■If, after you receive your PPP loan, customers or clients purchase your products or services and you receive and deposit customer payments, these payments won’t reduce the “paychecks” available to you under the PPP.

■You will owe the federal government any amount of your PPP loan that you do not use for the above purposes within the above eight-week period. However, you may repay this amount over two years at a one-percent interest rate.

 

 

John Cunningham is a Concord tax and business lawyer and estate planner. He has published Drafting Limited Liability Company Operating Agreements and Maximizing Pass-Through Deductions under Internal Revenue Code Section 199A. Both are the leading books in their fields. If you have business or tax questions you’d like addressed in this column, call John at (603) 856-7172 or e-mail him at lawjmc@comcast.net.