Nine Insights into PPP Loan Forgiveness for the Self-Employed
Updated on June 5, 2020, for Paycheck Protection Program Flexibility Act of 2020 (see Insight 8 below).
1. Do I Have to Spend the Paycheck Protection Program (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 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.”
You may remember from Self-Employed with No Employees? Get Your COVID-19 Cash Now that the SBA in its interim final rule stated that your 2019 Schedule C net profit determines your 2020 payroll forgiveness amount. You don’t have to make a new calculation. You simply insert that eight weeks of 2019 Schedule C net profit on line 9, not to exceed $15,385.
But the forgiveness form appears to not simply give you a precalculated 2019 forgivable insertion in its line 9 of Schedule A. It contains that troubling word “paid.”
Protect yourself from the word “paid.” Do this: make sure you spend the applicable 2019 Schedule C profit on yourself during the eight-week covered period.
Example 1. 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. (Note. See the Payroll Protection Flexibility Act of 2020 update in Insight 8 for how this forgiveness can be increased by electing the new 24-month rule.)
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.
Example 2. Jim, a Schedule C taxpayer, also has $100,000 of net profit on his 2019 Schedule C, but he has only one bank account. He uses it for both business and personal expenses. Sam receives a PPP loan of $20,833 and deposits it into his one bank account.
During the eight-week covered period, Jim spends from his sole bank account $15,385 on personal expenses such as groceries, the personal part of his mortgage, etc. His book of record shows the personal expenses as personal.
Again, there’s no paid rule for the Schedule C taxpayer other than what you see in the application for loan forgiveness. Using some caution here at the moment, it makes sense for Jim to make sure that during the eight- week covered period he paid personal expenses equal to or more than his Schedule C calculated payroll forgiveness amount.
2. Should I Put the Loan Proceeds in a Separate Bank Account?
You may have seen tax and accounting professionals recommend a separate bank account for the PPP loan proceeds.
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.
But in creating a separate checking account, you experience the inconvenience of creating a new account, obtaining the checks, and then paying the bills using the new checks.
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 separate PPP account that helps create a “pretty perfect paper trail” has much to say for itself.
3. When Do My Eight or 24 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. If you elect to apply the new 24 weeks from the Paycheck Protection Program Flexibility Act of 2020 to your existing loan, the 24 weeks begin on the loan origination date (generally the same as the disbursement date).
You would have an alternate date possibility if you had employees on a W-2 payroll.
4. 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 the following during your eight-week covered period (24 weeks and 40 percent if you elect to apply the Paycheck Protection Program Flexibility Act of 2020 to your existing loan—see Insight 8 below):
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; and
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.
Example 3. You claimed a home-office deduction in 2019 and you will do so again in 2020. You use 17.5 percent of your home for business, and you claim for PPP loan forgiveness 17.5 percent of
the mortgage interest you paid on your home mortgage during the eight-week covered period. You were one month behind when the eight weeks started, so you made three payments. The 17.5 percent of the mortgage interest on the three payments is eligible for forgiveness. (Prepaid interest is not eligible for forgiveness.)
the payments during the eight-week covered period for electricity, gas, water, telephone, and internet.
5. 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.
We have seen where some think that a “transportation utility” is gasoline for business vehicles. We’d like that to be true, but think not.
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.
6. 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 total payroll amount and divide by 0.75.
Example 4. 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.
Note. You can elect to have the newly enacted Paycheck Protection Program Flexibility Act of 2020 apply to your existing loan. Under this new law, the 75 percent payroll requirement drops to 60 percent.
7. 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. We are not covering employees in this issue because easier rules (which you will want to use) are on the way, as we explain below.
8. UPDATE June 5, 2020: New Law Creates Easier PPP 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 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 June 30 to December 31 the 24-week rule—changes the workforce-in-place requirement from
For business under the 24-week rule—creates a new, easier path to full loan forgiveness should the business be unable to sustain a full workforce
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 that there is money available today. If you have not applied, do it now.
To see why you want to do it now, go to Self-Employed with No Employees? Get Your COVID-19 Cash Now.
Takeaways
The PPP for the self-employed with no employees is a big deal. Unfortunately, its benefits are hidden in rules that apply to all businesses, and that creates confusion. Here are two steps you can take to avoid confusion:
Step one. Read Self-Employed with No Employees? Get Your COVID-19 Cash Now.
Step two. Reread this PPP forgiveness article, in which we explained:
that you have to spend the deemed Schedule C payroll portion of your PPP funds on yourself.
that using a separate bank account is a best practice but not required.
when your eight or 24 weeks begin.
why home-office deduction percentages of mortgage interest, rent, and utilities qualify for forgiveness.
what is a transportation utility.
why the 75 percent (and newly enacted 60 percent) rules are not a concern when you are self- employed and have no employees.
Don’t submit your forgiveness application now if you don’t have 100 percent forgiveness. Wait. Why? You may want to elect application of the newly enacted Paycheck Protection Program Flexibility Act of 2020, the provisions of which can likely get you to 100 percent.
And one final note, there are billions left in the PPP loan pot. If you have not applied, make sure to do so now.