Owner Compensation Replacement and Full PPP Forgiveness

By Owen Yin on June 18, 2020

If you’re self-employed and have a PPP loan, you can automatically claim a portion of the loan as a replacement for lost profit using a concept called Owner Compensation Replacement.

In light of new PPP guidelines, you may now be able to get the entire loan forgiven automatically. Here are the details on full loan forgiveness for self-employed folks.

Owner Compensation Replacement

In April, the Treasury and the SBA introduced the concept of the Owner Compensation Replacement. Because self-employed individuals such as independent contractors and gig workers don’t pay themselves through payroll, this concept allowed them to simply claim a portion of their loan to make up for lost income due to COVID-19.

Who can claim an Owner Compensation Replacement?

Anyone who files with a Form 1040 Schedule C can claim the OCR. It does not matter if you have employees or not.

How much can I claim?

PPP loans have a coverage period of 24 weeks. Over the 24 weeks, you can claim 2.5 months’ worth of your 2019 net profit, as reported on your Schedule C. Assuming your PPP loan did not include other payroll expenses, this amount would be equal to your entire PPP loan. The maximum amount allowed is $20,833.

If you received a PPP loan prior to June 5, 2020, you can choose to use an 8-week covered period, and you can claim 8 weeks’ worth of 2019 net profit instead. The maximum amount allowed is $15,385.

How do I claim my Owner Compensation Replacement?

There are no special conditions to follow. You can simply transfer the appropriate amount to your personal bank account.

When you complete the EZ Forgiveness application, you’ll just need to report the amount claimed on Line 1.

Is Owner Compensation Replacement free money?

Yes, essentially! You can treat the Owner Compensation Replacement as personal income and use it however you want. With the updated guidance allowing for 2.5 months’ worth of net profit as OCR, that means your entire PPP loan could be used for personal purposes—essentially free money.

How does Owner Compensation Replacement work with PUA or unemployment benefits?

The Owner Compensation Replacement will be considered to be income, so it’s not very compatible with unemployment benefits or the PUA.

You will need to report your OCR over the entire covered period. If you’re claiming 2.5 months of OCR, that means you will need to report 10 weeks’ worth of net profit over the entire 24 weeks. We do not expect you’ll be able to apply for forgiveness early, but the SBA may issue further guidance on this matter.

If you’re claiming 8 weeks of net profit for your OCR, you’ll need to report the income over the 8-week covered period.

After your PPP covered period, you can resume collecting unemployment benefits.

Further reading: How the PPP, EIDL, and PUA Work Together

Is Owner Compensation Replacement taxable income?

While the CARES Act indicates that forgiven PPP amounts aren’t taxed and can be treated like a tax-free grant, we believe this doesn’t clearly account for the OCR and its purpose as a substitute for actual income.

Until further guidance is published, we recommend working under the assumption that you will need to report the claimed OCR as personal income on your 2020 tax return.

Can I pay myself a bonus too?

No. You are limited to just the Owner Compensation Replacement, up to the $100,000 annualized salary cap.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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