We have received many questions regarding how the Paycheck Protection Program (PPP) loan applies to the self-employed. Specifically, how much of the loan may be forgiven? Here is what we believe based on guidance that the SBA has issued to date:

Loan Forgiveness For Self-Employed Individuals. The full PPP loan principal amount plus accrued interest is eligible for forgiveness. The actual amount of forgiveness will be calculated based on:

  1. payroll costs for any employees (not the owner), including salary (a maximum of $15,385 per individual during the eight-week covered period) and covered benefits;
  2. the self-employed individual’s “Owner Compensation Replacement”, but only up to an amount limited to eight weeks’ worth (8/52) of the 2019 Schedule C net profit amount (excluding amounts for which a credit is claimed under either Section 7002 or Section 7004 of the Families First Coronavirus Response Act);
  3. payments of interest on covered mortgage obligations incurred before February 15, 2020 (to the extent deductible as a business expense on Form 1040 Schedule C);
  4. covered rent payments under lease agreements in force before February 15, 2020 (to the extent deductible as a business expense on Form 1040 Schedule C,); and
  5. covered utility payment under lease agreements dated before February 15, 2020 (to the extent deductible as a business expense on Form 1040 Schedule C).

To simplify, if you are self-employed and have received a PPP loan, your lender will forgive the loan up to 8/52 of your net business income as reported on Schedule C of your 2019 individual tax return. 2020 net income is irrelevant! All that you will need to do to qualify for this is to file a 2019 tax return showing the Schedule C net income, so please contact us today if you need to file that return.

Any remaining loan amount can also be forgiven to the extent that you have the expenses listed above during the 8-week period in 2020 after you receive the loan proceeds.  You will need to document these payments with your lender.

Example:

Joe is self-employed and had 2019 net business income of $50,000 on his 2019 Schedule C.  He received a PPP loan of $10,000 on May 1, 2020. His business rents office space for $2,000 per month, and that lease was in place before February 15, 2020.

8/52 of $50,000 = $7,692.  This amount will automatically be forgiven.

The remaining loan amount of $2,308 will also be forgiven as long as Joe uses the proceeds to pay rent on his business office space during the 8-week period after May 1. If he did not have rent but did have utilities, a business mortgage, or salary for employees, those expenses could also qualify as described above.

It is unclear how the rent, mortgage, and utility calculation will work for those who claim a home office deduction as opposed to renting dedicated office space. It is possible that home office expenses will not qualify at all.

Also, some experts disagree with the above altogether and believe that only the 8/52 “Owner Compensation Replacement” portion of the loan can be forgiven. In other words, they believe that the SBA guidance does not permit the self-employed to count rent, utilities, and business mortgage payments, even though non-self-employed businesses are permitted to use PPP loan proceeds for these payments over an eight week period to forgive up to 25% of their loans. This interpretation is based on some confusing text in the SBA guidance. However, our belief is that Congress did not intent the self-employed to be in a worse position than non-self-employed businesses, and so the SBA will eventually clarify their guidance in line with our analysis above.

Of course, your PPP lender is the final authority on how much of the loan will be forgiven, so please consult with them for further information and guidance.