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Business Owners

PPP Loan Forgiveness for Self-employed individuals

By:

Aaron Morris

Whether you are self-employed, a sole proprietor or an independent contractor with no employees, the paycheck protection program (PPP) is a COVID-19 relief program designed to help you survive the pandemic.  

Utilize the following highlights to help you successfully navigate the forgiveness process which began on August 10, 2020:

New, Easier PPP Forgiveness is here

On Thursday, May 28, the U.S. House of Representatives approved the Paycheck Protection Program Flexibility Act of 2020 by a vote of 417-1. This bill has been enacted to make it easier for all PPP borrowers to qualify for PPP loan forgiveness.

Here are some highlights from this bill:

  • Extends spending window from eight weeks twenty-four weeks
  • Extends spending deadline from June 30 to December 31
  • Changes the payroll threshold rule from 75 percent to 60 percent
  • Changes the repayment period from two years to five years at 1 percent interest rate
  • Adds exemptions that increase full-time equivalents and increase forgiveness amounts
  • Makes it easier to obtain forgiveness when you have reductions in your employee levels

Which loan forgiveness application should I use:

Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form automatically qualify to use the Loan Forgiveness Application Form 3508EZ or lender equivalent and should complete that application.

When Does My Eight or Twenty-Four Weeks Begin?

According to the latest interim guidance and consistent with SBA Form 3508 & 3508EZ, with no employees, your eight or twenty-four 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.

How to calculate Paycheck Protection Program (PPP) Loan Forgiveness?

The Covered Period is either: (1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date, or (2) if the Borrower received its PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56-day) Covered Period. For example, if the Borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.

Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners).

For an 8-week Covered Period, that maximum total loan amount is $15,385. For a 24-week Covered Period, that total is $46,154 for purposes of this 3508EZ.

For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.

How Does the 60 Percent Work?

When you file 2019 Schedule C and have no employees, your minimum loan forgiveness amount is your Payroll amount divided by 0.60.

Example 4. Your PPP loan is $20,833 which is the max compensation to an employee/owner over a 24-week period; $15,385 for 8-week period. Let’s say your Schedule C payroll to yourself is $11,385.

  • Your maximum loan forgiveness amount is $11,385 divided by 0.60, or $18,975.
  • Your minimum loan forgiveness amount is the 2019 Schedule C payroll component of $11,385, assuming you meet the paid rule as explained above. If less than $11,385 is paid to the owner, then the total loan is unforgivable.

If you spend $7,000 on interest and utilities over the 24-week period; your loan forgiveness amount is $18,385 ($11,385 + $7,000). You can let the unforgiven $2,448 ($20,833 - $18,385) continue as a 1 percent interest loan for five years from the date of the loan or you can pay it off during this time frame with no prepayment penalties.

When would I utilize form 3508?

You may utilize the 3508EZ form if your employees were not furloughed, terminated nor greater than 25% compensation reduction.

Form 3508 is required if your loan amount exceeds $2M and/or furloughed or terminated employees.

Is interest on unsecured credit or real property eligible for loan forgiveness?

Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.

However, payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. 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 40 percent of total forgiveness) may include the following during your eight or twenty-four 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; 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.

If you need our assistance with either the PPP loan forgiveness, we are here to be of service. Contact us at (818) 340-0157.

The information above is provided for general informational purposes only and does not constitute financial advice. Individuals should not apply information to a specific situation and should consult their financial professional. Charlesworth & Rugg, Inc. is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information. © 2020 Charlesworth & Rugg, Inc.