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SBA PPP Loan Forgiveness Challenges & Guidance for Self Employed

04/20/2020 Emir Hodzic

Funding allocated by the CARES Act to the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) was officially exhausted by Thursday, April 17th, less than two weeks after the loan program was launched and banks started taking applications. With the entire $350 billion allocated to small businesses who have applied for and received their SBA approval and E-Tran number, the funding of those loans is starting to trickle in. Businesses are now shifting their attention to planning how to spend the funds and navigate the confusing forgiveness parameters within the act itself, as SBA guidance is slow to keep up. Banks must fund loans within ten days of approval, which is proving to be as daunting a task as fielding the hundreds of thousands of applications in the two-week period of the loan program.

In an interview on Sunday, Treasury Secretary Mnuchin stated that he expects Congress to complete a deal for another $300 billion injection into the program, which he believes will be enough to fund the demand. Many businesses were not able to apply and obtain SBA approval before the funding ran out on Thursday. In particular, self-employed individuals, many of whom report income on a Schedule C, were not even allowed to apply prior to April 10th, giving banks only four days, including Easter weekend, to field requests.  If additional funding is approved, self-employed individuals should plan ahead to make sure their applications are quickly processed.

What can Self-Employed individuals do to prepare?

In order to prepare for the next round of applications and funding, self-employed individuals should accumulate the following information:

  • Completed and updated application (https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form-Fillable.pdf)
  • Calculation of average monthly payroll cost calculated from 2019 Schedule C, line 31, “net profit amount,” divided by 12.
  • 2019 Schedule C, even if your 2019 tax returns have not yet been filed.
  • Gather any 2019 IRS Forms 1099-MISC received from customers. The non-employee compensation received is shown in box 7.
  • Invoice, bank statement, or book of record that establishes you are self-employed and were in operation on or around February 15, 2020.
  • If you have employees obtain 2019 IRS Form 941’s.
  • Health insurance invoices.
  • If you have already received an Economic Injury Disaster Loan (EIDL), you’ll need to determine whether to refinance it under a PPP Loan.

Stay in close touch with your bank and be prepared to submit the application as soon as they are ready to accept it.

Self-employed individuals should also be aware that forgiveness of the loan may function differently than for other small businesses. While the actual amount of loan forgiveness will still factor in payroll cost of employees, including health care expenses, retirement contributions, and state taxes on employee payroll paid by the employer, the owner compensation replacement is limited to eight weeks’ worth (8/52) of 2019 net profit from the Schedule C. If you do not have employees, you are eligible for a fraction of the total loan forgiveness available.  For example, an individual who reports $200,000 of net profit on their 2019 Schedule C would be limited to only $100,000 of net profit to use in the calculation. The amount is then divided by 12 and multiplied by 2.5 to arrive at the loan amount of $20,833. The same $100,000 is divided by 52 weeks and multiplied by 8 to arrive at a forgiveness amount of $15,384, which would mean the borrower would have $5,449 of debt remaining. This debt must be paid back unless the SBA clarifies if other costs are included under forgiveness such as rent, utilities, and mortgage interest.

More SBA guidance is needed for self-employed individuals applying for the loan, as well as the lending institutions fielding the applications.

Loan Forgiveness Challenges

Those businesses who have been approved for loans or, who have already received funding, have now shifted focus on spending the proceeds in accordance with regulations, in order to ensure the loan is forgiven. There are many unanswered questions that we expect more guidance on; some of the common questions revolve around the eight-week timeframe.

The SBA has clarified that the eight-week period begins on the date the borrower receives the distribution of the loan and, with the bank requirements to make the disbursement within ten days of loan approval, most businesses have an understanding of when the clock begins. Costs must be incurred and payments made within the eight-week covered period in order to be forgiven.  We expect more clarification on this issue but, for the time being, businesses should plan on matching their payments when expenses are incurred in order to qualify  for forgiveness..

One important factor for every business to consider is the SBA limit on the forgivable portion of non-payroll cost of 25% of the maximum loan forgiveness. This has some significant implications on a firm’s ability to spend the loan proceeds and have it  be forgiven.

Mathematically, the SBA’s limit is calculated as a firm’s expected payroll cost over the eight week period divided by 75%.


ABC Company, Inc. had $4,800,000 in payroll costs in 2019. The maximum amount of PPP loan proceeds is $1,000,000. ABC Company, Inc. plans on maintaining payroll at the same rate as in 2019 and calculates that it will pay out $700,000 in payroll costs in the eight-week period after receiving the loan.

SBA limits the forgivable portion of non-payroll costs to 25% by taking the $700,000 in payroll cost spent during the eight-week period and dividing it by 75%. Therefore, the maximum amount of loan forgiveness is $933,333, leaving $233,333 to be absorbed by rent, utilities, and mortgage interest, and $66,666 remains a loan to be repaid under the terms of the note.

In the example above, the firm’s ability to spend PPP funds on forgivable costs other than payroll is driven by the actual amount of payroll spent during the eight-week period.

It’s important to note that without specific guidance from the SBA on any forgiveness questions businesses may have, lenders will have to enforce their own interpretations. Maintaining contact with your banker will be key to understanding how applications for forgiveness should be handled.

Many “non-essential” businesses who have already received their funds but are not yet able to activate their workforce, must now consider their ability to re-hire and spend funds on payroll cost and whether in fact they’ll be able to come close to achieving maximum loan forgiveness. In many instances, the employees are drawing on unemployment funds which provide for an additional $600 per week from the CARES Act. By bringing these employees back into the workforce, as expected by the business when they applied for the PPP loan, the business should evaluate whether or not they’ll be able to use all of the funding and, if not, determine if they are prepared to service the debt.

Additionally, while forgiven funds are not considered taxable income, questions arise as to whether or not that will hold true for businesses at the state income tax level. There is also the question of whether or not the payroll costs, rent, and utilities the funds will be spent on are tax deductible in 2020. Taxpayers should be mindful of that variable as they plan their spending.

Clarity is also required in determining the reduction in forgiveness amounts for employers who have already made employee reductions and aren’t able to re-hire employees. The CARES Act states that a reduction made between February 15 and April 27, 2020, will be ignored if no later than June 30, 2020, the borrower has restored the employee levels to what they were on February 15, 2020. This formula involves many complexities and variables that must be considered over the eight-week period and through June 30, 2020. Questions persist regarding the rehire of previously furloughed or terminated employees. For example, would it be viable for a business to rehire for a completely different position if that position did not previously exist within the firm?

Another stipulation is the reduction in the forgiveness amount if any individual employee’s wages are reduced over the eight-week period in excess of 25% of the total salary or wages of the employee relative to the most recent full quarter during which the employee was employed before the covered period. The challenge posed, is that a typical quarter will contain 12 weeks but the pay period is only eight weeks long and accounts for 67% of a typical quarter. If this stipulation is to be interpreted as written, unless the borrower increases payroll company-wide, they will likely see their loan forgiveness reduced even further.

As businesses continue down the PPP rollercoaster, they should err on the side of caution. There are many scenarios that may not fully unravel until after approved funds have been spent. Businesses should also keep in mind that the loan program is generally subject to the Freedom of Information Act requests and may become public. Strict caution on how the funds are handled and spent is advised.

VonLehman experts have compiled a COVID-19 Resource Center, where you can find numerous resources, specific to your industry, to help you navigate these difficult times. For any questions related to this article, contact Emir Hodzic at ehodzic@vlcpa.com or 800.887.0437.

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