Nine Insights into PPP Loan Forgiveness for the Self-Employed

When you are self-employed with no employees, the Paycheck Protection Program (PPP) is a COVID-19 gift designed to help you get through this pandemic.

If you now have your PPP funds, we have identified nine insights for you.

1. New Law, Enacted June 5, 2020, Creates Easier PPP Loan Forgiveness

On Thursday, May 28, 2020, the U.S. House of Representatives approved the Paycheck Protection Program Flexibility Act of 2020 by a vote of 417-1. On Wednesday, June 3, 2020, the Senate passed the bill by a unanimous voice vote. The president signed the bill into law on Friday, June 5, 2020.

Here are some highlights from this new law:

  • For a business that currently has a PPP loan—allows the business to extend the eight weeks to 24 weeks or elect to retain the original eight weeks
  • For those under the 24-week rule—requires that 60 percent of the loan proceeds be spent on payroll
  • For new loans, changes the payback period for the (unforgiven) loan from two years to five years, and retains the 1 percent interest rate; for existing loans, authorizes the bank and borrower to agree to a five-year payback
  • For those businesses under the 24-week rule—changes the workforce-in-place requirement from June 30 to December 31
  • For businesses under the 24-week rule—creates a new, easier path to full loan forgiveness should the business be unable to sustain a full workforce

The remaining insights into the eight-week rules give you (as a Schedule C taxpayer) the runway that applies to both the eight-week and 24-week rules.

2. Do I Have to Spend the PPP Loan Proceeds?

Yes, it appears so. The instructions for line 9 of Schedule A for the U.S. Small Business Administration’s (SBA) Form 3508 PPP loan forgiveness application state:

Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

Note the word “paid.”

Example. Sam shows 2019 Schedule C net profits of $100,000 and obtains a PPP loan of $20,833. By the SBA interim final rule, his payroll forgiveness amount is $15,385 based solely on his 2019 Schedule C.

Sam maintains both business and personal bank accounts. Sam deposits the $20,833 into his business account. During Sam’s eight-week covered period, he takes $15,385 out of his business account and puts it in his personal account. Presto, he has satisfied the “paid” requirement that you see on line 9 of the loan forgiveness application.

We don’t know that Sam had to satisfy the “paid” requirement of line 9, but we do know that Sam can sleep better now.

3. Should I Put the Loan Proceeds in a Separate Bank Account?

With a separate bank account from which you use the PPP loan proceeds, you can create a pretty perfect paper trail as to the use of the proceeds.

From a practical standpoint, you should be able to use your existing accounting methods to prove the use of the PPP loan proceeds. But the idea of a separate PPP account and the creation of a “pretty perfect paper trail” has much to say for itself.

4. When Do My Eight Weeks Begin?

According to the latest interim guidance and consistent with SBA Form 3508, with no employees, your eight weeks begin on the date the lender disburses the funds to you.

You would have an alternate date possibility if you had employees on a W-2 payroll.

5. Can I Claim Forgiveness for the Business Interest and Utilities Percentage I Pay for My Home Office?

Yes. When you claim the home-office deduction on your Schedule C, it reduces the net profits from your business. In other words, the home-office deduction is a business deduction.

Under the current loan forgiveness rules, your non-payroll PPP loan forgiveness amount (limited to a maximum of 25 percent of total forgiveness) may include any or all of the following during your eight-week covered period:

  • interest payments on any business mortgage obligation on real or personal property where such obligation was in place before February 15, 2020 (but not any prepayment or payment of principal)
  • payments on business rent obligations on real or personal property under lease agreements in force before February 15, 2020
  • business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

To put this in perspective, you need both the home (rented or owned) and the home office in place before February 15, 2020.

6. What Is a Transportation Utility?

We have not seen from the SBA or the Department of the Treasury an official definition of a “transportation utility” with respect to the PPP loan process.

The Federal Highway Administration’s Center for Innovative Finance Support says:

Transportation utility fees are a financing mechanism that treats the transportation system like a utility in which residents and businesses pay fees based on their use of the transportation system rather than taxes based on the value of property they occupy.

The definition above is what we think the SBA and the Department of the Treasury are thinking of.

7. How Does the 75 Percent Work?

When you file Schedule C and have no employees, your minimum loan forgiveness amount under the 75 percent rule is straightforward. Take your payroll amount and divide by 0.75.

Example. Your PPP loan is $20,833. Your deemed Schedule C payroll to yourself is $15,385.

  • Your maximum loan forgiveness amount is $15,385 divided by 0.75, or $20,513.
  • Your minimum loan forgiveness amount is the 2019 Schedule C payroll component of $15,385, assuming you meet the paid rule as explained above.

Say you meet the paid rule and spend $4,000 on interest and utilities; your loan forgiveness amount is $19,385 ($15,385 + $4,000). You can let the unforgiven $1,448 ($20,833 – $19,385) continue as a 1 percent interest loan for two years from the date of the loan, or you can pay it off during this time frame with no prepayment penalties.

8. What If I Have Employees?

With employees, the calculation of how you qualify for your personal portion of loan forgiveness is unchanged.

But you have to make a number of calculations to figure the forgiveness you receive because of your employees.

9. PPP Money Still Available; Apply Now

As of 5:00 p.m. eastern time on Friday, May 29, the SBA had approved 4.3 million PPP loans totaling $510.2 billion.

The Journal of Accountancy reports that a total of $138 billion remained available in PPP funding as of May 23. That means there likely is money available today. If you have not applied, do it now.

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