Nine Insights into PPP Loan Forgiveness for the Self-Employed

1. Do I Have to Spend the Paycheck Protection Program (PPP) Loan Proceeds? 

Yes, from the looks of the law.

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.

Let’s focus on that word “paid.” Do you 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. This way, you do not have to make a new calculation. You can just insert that 8 weeks of 2019 Schedule C net profit on line 9, not to exceed $15,385.

However, the forgiveness form appears to not simply give you a pre-calculated 2019 forgivable insertion in its line 9 of Schedule A. It also has that concerning word “paid.”

The word “paid” can pose a threat to some people. Do this: make sure you spend the applicable 2019 Schedule C profit on yourself during the eight-week covered period.

Example 1. Tim 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.

Tim maintains both business and personal bank accounts. Sam deposits the $20,833 into his business account. During Tim’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 Tim 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. Jim 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 eightweek covered period he paid personal expenses equal to or more than his Schedule C calculated payroll forgiveness amount.

2. Is it Smart if I Put the Loan Proceeds in a Separate Bank Account?

You may or may not have noticed that 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 Exactly 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.

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

  • 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 Exactly 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.

However, 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.

7. What Do I do 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. New, Easier PPP Forgiveness Coming Your Way

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 or something similar will be enacted in June to make it easier for all PPP borrowers to qualify for PPP loan forgiveness.

Here are some highlights from this bill:

  • Extends the eight weeks to 24 weeks
  • Changes the 75 percent rule to 60 percent
  • Changes the two years to five years and retains the 1 percent interest rate
  • Changes June 30 to December 31
  • Adds exemptions that will increase full-time equivalents and that will increase forgiveness amounts
  • Will make it easier to obtain forgiveness when you have reductions in your employee levels

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.

Here are Some Important 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.

Don’t submit your forgiveness application now. You should really wait because forgiveness is going to be easier beginning in mid-June. The House has passed its version of making the PPP forgiveness easier. The Senate has a version. At the end of the process, likely within two weeks, you will have rules that will increase your forgiveness amount.

So not to worry, whatever amount you have for forgiveness now is not going to become less but rather more with the new law.

And one final note, there are billions left in the PPP loan pot. If you have not applied, make sure to do so now.

Still have questions? Give me a call and let’s walk through it together.