Nine Insights into PPP Loan Forgiveness for the self-employed

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

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

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.”

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.

2. 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.

3. 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.

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.

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.

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 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 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.

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.

If you need our assistance with either the PPP loan or forgiveness, we are here to be of service. My direct line is 510-417-7050.

Paycheck Protection Program loan forgiveness

Learn how you can prepare for Paycheck Protection Program (PPP) loan forgiveness.

If you’re a recipient of a PPP loan, you may apply for forgiveness 8 weeks after your lender sent you the PPP funds. All or part of your loan may be forgiven, if you meet certain requirements.

The use of the PPP loan proceeds listed below pertain to the forgivable amount of a PPP loan, and are not the only allowable uses of a PPP loan.

Regulations and guidance from the SBA and the U.S. Department of the Treasury on the PPP are evolving rapidly and the below information may be outdated. Please refer to the latest guidance from SBA and Treasury to confirm current program rules.

Note: If you are inquiring about new applications for the Paycheck Protection Program, we are not accepting new applications at this time. If you have already applied for a PPP loan within QuickBooks Capital, your application is currently pending and no additional information is needed at this time. We’ll notify you via email when we have an update.

Note: The amount of the loan forgiveness can be up to the loan principal amount plus accrued interest.
· Principal: the sum of the PPP loan money you received.
· Accrued interest: the interest on the PPP loan.

Here are some things you should consider:

What’s the best way to use my PPP funds if I want to maximize my potential loan forgiveness?

Use the PPP loan funds within an 8-week period after your lender sent you the funds. You don’t have to use all of your loan proceeds in the first 8 weeks. However, amounts you spend after this 8-week period won’t be forgivable.

Use 75% or more funds on eligible payroll costs.

Eligible payroll costs include compensation for employees whose principal residence is the U.S., including:

Salary, wages, commissions, or similar compensation
Additional wages paid to tipped employees, if applicable
Employee benefits, such as PTO, allowance for employee separation of dismissal, insurance premiums, taxes, and retirement

To the extent an employee earns in excess of $100,000, you may only include a maximum payroll amount of $15,385 per employee in your forgiveness amount determination.

If you’re a Form 1040 Schedule C filer:

Effective April 20, 2020, the SBA adopted a different rule applicable to those that filed or will file a 2019 Form 1040 Schedule C. Under the new rule, for example, owner compensation replacement, for purposes of determining loan forgiveness, is limited to 8-weeks’ worth of 2019 net profit amount, capped at $15,385.

However, it is not yet clear whether Schedule C filers that applied or had their application submitted to the SBA before April 20, 2020 should apply for forgiveness under the old rule or new rule. The SBA is likely to issue additional guidance in the future.

Use up to 25% of funds on other eligible business costs:

Business mortgage interest payments on mortgages in effect before February 15, 2020
Rent payments on leases dated before February 15, 2020
Utility payments for electricity, gas, water, transportation, telephone, or internet access under service agreements dated before February 15, 2020

If you’re a Form 1040 Schedule C filer:

Under the SBA’s April 20, 2020 rule, business mortgage interest payments, rent payments and utility payments for Schedule C filers must have been deductible on the 2019 Form 1040 Schedule C submitted with the loan application.

What else may impact your forgivable amount?

If you have employees, your loan forgiveness amount may be reduced as a result of reductions to employee headcount or wages.

Reducing the number of employees:

Your loan forgiveness amount may be reduced if the average number of full-time equivalent employees* you employ during the 8-week period after the lender sent your PPP loan funds to you is less than the average number of full-time equivalent employees per pay period between:

February 15, 2019 and June 30, 2019, or
January 1, 2020 and February 29, 2020

Most borrowers can choose which time period to use for comparison, but seasonal employers must use February 15, 2019 to June 30, 2019.

If any full-time employee reductions made between February 15, 2020 and April 26, 2020 are reversed by June 30th, 2020, your loan forgiveness amount will not be reduced.

Reducing employee salary or wages

Your loan forgiveness amount may be reduced if you reduce total salary or wages for any employee during the 8-week period after the lender sent your PPP loan funds to you more than 25% as compared to the most recent full quarter before the 8-week period.

If reductions made between February 15, 2020 and April 26, 2020 are reversed by June 30, 2020, your loan forgiveness amount will not be reduced.

This forgiveness reduction does not apply to reductions associated with employees who had a salary or wages higher than $100,000 in 2019.

Economic Injury Disaster Loan Advance

If you received an advance through the EIDL program, it will be deducted from your forgivable amount on a PPP loan.

How do I apply for forgiveness?

If you’re a PPP loan recipient, you will submit an application for forgiveness to your lender. Once you submit your application, your lender will determine your loan forgiveness eligibility.

Note: Once you submit your application for forgiveness, your lender will have 60 days to accept or deny your application.

To apply for loan forgiveness, you can submit an application to your lender including the following information for the 8-week period after the lender sent you the PPP funds:

Payroll tax filings
State income, payroll and unemployment insurance filings
Canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage obligations, payments on covered lease obligations, and utility payments
Documentation of any advance received under the CARES Act EIDL Emergency Grant program