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COVID-19 Response: PPP Forgiveness Applications and a Sole Proprietor Application Example


by Megan Roberts, Extension educator

Note. On October 8, 2020 SBA released a third forgiveness form, the 3508S, for borrowers with PPP loans under $50,000. The fictional borrower in the example shown below would likely use the 3508S not the 3508EZ based on the smaller size of their loan. However, this post still provides relevant example calculations that may help a borrowers understand forgiveness eligibility and therefore remains posted. Remember, requirements for PPP change frequently. Consult your lender and/or tax professional for the most up-to-date information.

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For small business owners that applied for the Paycheck Protection Program (PPP) and are using the shorter 8 week covered period, now is the time to consider your PPP loan forgiveness application. Any PPP recipient that received their loan prior to June 5 can choose to keep their loan covered period at the original 8 weeks or can elect to choose the new covered period of 24 weeks. Loans issued June 5 and after have a 24 week covered period. This longer covered period was made possible due to the Paycheck Protection Program Flexibility Act of 2020, H.R. 7010, which was signed into law on June 5, 2020.

Forgiveness Applications

If you choose to keep the shorter 8 week period and received your loan in early April, you have reached the end of the covered period and can now inquire for forgiveness using the forgiveness application released by SBA on June 16, 2020. Forgiveness of the PPP loan is not automatic; you must apply for forgiveness via your lender within 10 months of the last day of your covered period.  At least 60% of the loan forgiven amount must be used for payroll. Other costs eligible for forgiveness include business related mortgage, rent, and utilities. Due to the revisions requested from Congress in June, there are now two different forgiveness forms: a 3508EZ and a 3508 (Note. On October 8, 2020 SBA released a third form, the 3508S.) The Form 3508EZ can be used if you meet any one of the following:
  • are a single owner with no employees, OR
  • did not reduce any single employee’s wages by more than 25% and did not reduce overall number of employees or hours during the covered period (with the exception of safe harbor FTE reductions), OR
  • did not reduce any single employee’s wages by more than 25% and you were unable to operate at normal business levels during the covered period due to COVID-19. 
If you do not meet one of those three options then you need to use the longer Form 3508, which requires more calculations and documentation. Both the 3508EZ and 3508 forms have separate PDF directions available on SBA’s PPP forgiveness webpage. Your forgiveness application is submitted via your lending institution, so while the following example utilizes the standard SBA PPP loan forgiveness application form, you may have different protocols based on where you lend. Furthermore, some lenders are not yet ready to accept forgiveness applications be it the SBA form or a lender created equivalent form. Your lender, in coordination with guidance from SBA, determines forgiveness approval, verifies required documentation of eligible costs, and is your primary source of information on forgiveness.

This blog post tackles the first in a series of examples of PPP loan forgiveness applications. The example is simply for illustration purposes.

Sole Proprietor/ Single Owner, No Employees

In this example, Sally Farmer is a sole proprietor without employees. She works fulltime on her farm. According to her 2019 Schedule F, she had over $100,000 of net farm income.[1] On her PPP application, Sally maxed her net income at $100,000, divided by 12 months in a year and multiplied by the PPP factor of 2.5. Therefore, her PPP loan amount was $20,833, which she received on April 15. Sally qualifies for using the 3508EZ by meeting the first bullet point listed above. (Note. As of October 8, 2020 Sally also qualifies for the 3508S form for borrowers under $50,000. It is recommended to use that form when able.)  As a sole proprietor / single owner without any employees, she can enter a “0” in the employee number blanks on the forgiveness application.[2] Her payroll schedule is “other” as she earns net farm income at the end of the year and does not have a set frequency in which she “pays” herself.

Sally did not get an Economic Injury Disaster Loan (EIDL) advance. But if she had, she would enter the amount of the advance in the EIDL advance blank and fill in the EIDL loan number blank. If participating in the EIDL program, sole proprietors without employees received $1000 in a loan advance. SBA and your lender will take the advance amount into account when determining forgiveness of your PPP loan, reducing your forgiveness dollar-for-dollar by the value of your EIDL advance. Your total EIDL amount is not a factor in forgiveness, just the EIDL advance amount.

Sally decides to keep the shorter 8 week covered period as she has other eligible expenses in addition to her "payroll" of 8 weeks equivalent of her 2019 net farm income. She marks her covered period dates on her forgiveness application, April 15 to June 10. If she did not have any other eligible expenses (i.e. no business mortgage interest, business rent or lease payments, or business utility payments) to submit or very limited other eligible expenses (in Sally’s case eligible expenses less than $5,448), Sally would want to use the 24 week covered period to be able to qualify for full forgiveness. 

There is another reason Sally may want to consider a 24 week covered period. For sole proprietors without employees, electing the 24 week covered period will help achieve full forgiveness using only owner’s compensation for eligible expenses. For a sole proprietor without employees, if forgiveness is obtained in 2020 using owner’s compensation (which is already non-deductible) prevents having to reduce deductible non-payroll expenses on 2020 taxes.  

Using a net farm income of $100,000 as an example, SBA’s 3508EZ application directions explain the difference in payroll amounts allowed for owner compensation based on the 24 week or 8 week covered period: “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. For an 8 week Covered Period, this amount is capped at 8/52 of 2019 compensation (up to $15,385).”

Please note, if a recipient of a PPP loan applied for the loan after June 5, they must use the longer 24 week covered period with the last possible covered date December 31, 2020.

Snapshot of an Example PPP Forgiveness Application, Single Owner No Employees

Line 1

To determine line 1 of the application, Sally can look to page two of the 3508EZ directions for assistance. Based on the directions, because Sally made over $100,000 on her 2019 Schedule F and is using the eight week covered period, she should enter the maximum of $15,385 in line 1. As stated above in the quote from SBA, $15,385 is $100,000 divided by 52 weeks multiplied by 8 weeks. If a single owner made less than $100,000 and is using the 8 week covered period, they need to take their respective 2019 net farm income, divide by 52 weeks and multiply by 8 weeks. 

While the SBA does not currently (at the time this writing) require a sole proprietor owner without a separate business structure to write out a check in owner’s compensation, a de facto policy from some CPA firms and lending institutions has emerged suggesting this practice. In the absence of any governmental policy on this matter, it may still be advisable to transfer funds for owner’s compensation in a documentable way.

Lines 2-4

Sally then enters her eligible non-payroll costs on line 2 (mortgage interest), line 3 (rent/lease), and line 4 (utility payments). To be eligible for full loan forgiveness, the total amount submitted on lines 2, 3, 4 should not be greater than 40% of loan. For Sally that would be $20,833 multiplied by 40%, which is $8,333. For a self-employed individual, lines 2, 3, and 4 should also only be expenses incurred during the covered period and consistent with expenses submitted as deductions on your 2019 tax forms. The Treasury determined “it is appropriate to limit self-employed individuals’ (who file a Form 1040 Schedule C) use of loan proceeds to those types of allowable uses for which the borrower made expenditures in 2019” (CFR 13 CFR Part 120, III.d.v).  For self-employed farmers using a Schedule F instead of a Schedule C, this guidance on eligible expenses needing to have also been submitted on 2019 tax forms still applies. In other words, if 2020 business mortgage interest, rent/lease, or utility expenses during the covered period are not consistent with expenses on your 2019 tax forms, then they are not eligible. Do not include any pre-payments.
  • Examples of eligible mortgage interest (equivalent of Schedule F Line 21a) could be loan interest incurred during the covered period for a business related mortgage such as on farmland or on a barn. 
  • Examples of eligible rent or leases (equivalent of Schedule F Line 24a and 24b) could be payments incurred during the covered period for things your business uses but does not own such as rent or lease payments for farmland, farm equipment, business vehicles, a machine shed, or a barn. 
  • Examples of business utility payments (equivalent of Schedule F Line 30) incurred during the covered period include business related electricity, gas, water, telephone, transportation, or internet access.

Sally incurred no mortgage interest payments, but she did incur $3,000 of eligible lease payments on her farm equipment and $2,500 of eligible farm-related utility payments. These 2020 expenses were consistent with eight weeks worth of similar 2019 expenses submitted on her 2019 Schedule F, so she enters them on her PPP forgiveness application.

Lines 5-8

Line 5 is the sum of lines 1-4, $20,885. Line 6 is her original loan amount of $20,833. Line 7 is $25,642 and accounts for the requirement that payroll is 60% or greater of the cost. Therefore, line 1 of $15,385 is divided by .60, which equals $25,642. The forgiveness amount is the smallest of lines 5, 6, and 7. Sally enters $20,833 in line 8. Sally submits her SBA forgiveness application (or lender equivalent) to her lender, along with any lender required documentation. The lender has 60 days to review it. In this example, her lender approves her application, and Sally’s loan is fully forgiven. She has nothing to repay.

Summary and Notes

Calculate carefully and make sure to follow all rules of the application, including gathering necessary documentation of all eligible expenses incurred. The Loan Forgiveness Application Form and an additional Interim Final Rule issued on May 22, 2020 state that a borrower will be required to retain documentation related to its PPP loan for six years after forgiveness or repayment of the loan, including “documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements." Currently, PPP expenses used for forgiveness are unable to be included as tax expenses in the year of forgiveness. Therefore, for an applicant such as Sally with no employees, it is preferable to use as much of the PPP loan for owner's compensation, which is already non-deductible. This can be achieved for an owner without employees by selecting the 24 week covered period instead of the 8 week covered period.

If a PPP loan is not forgiven or is only partially forgiven, according to SBA, “loans issued prior to June 5 have a maturity of 2 years. Loans issued after June 5 have a maturity of 5 years. All loans have an interest rate of 1%.” An unforgiven PPP loan is still very low cost financial relief.

Finally, a word of cautiousness: laws and rules related to PPP have changed several times and are complicated. The Sally Farmer example illustrates a simple and fictional scenario. JULY 2020 UPDATE: For example, the deadline to apply for initial funding through PPP has been extended multiple times. The most recent change [signed into law on July 4, 2020] extends the initial application deadline to August 8. The need for a separate forgiveness application has not changed.

[1] $100,000 is the maximum individual compensation allowed for PPP loans, so this number is used in this example to show the largest loan amount for a single owner, no employees.
[2] The number of employee blanks should match whatever the applicant used in their PPP loan, generally it should match the number of W2s issued by the employer. A single owner without employees and no separate business structure should be entering a zero.

Caution: This blog is offered as educational information. It does not constitute legal or financial advice. Please contact your lender or tax professional with questions.


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