Paycheck Protection Program Loan Forgiveness Application: Self-Employed Farmer with Two Full-Time Employees

By Rob Holcomb and Megan Robert, Extension Educators, Agricultural Business Management

After the passage of the Paycheck Protection Program Flexibility Act, H.R. 7010, the Small Business Administration (SBA) created a simplified form to use when applying for PPP loan forgiveness.  This new simplified form is SBA Form 3508EZ.  SBA also published a new set of instructions for the Form 3508EZ.

PPP borrowers may use SBA Form 3508EZ if they meet the following criteria.

• 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. 

This blog post builds upon an earlier June 17 blog post from Megan Roberts titled “COVID-19 Response: PPP Forgiveness applications and a Sole Proprietor Example.”

This example will utilize the SBA Form 3508EZ.  The borrower, in this example, Joe Farmer, is a self-employed dairy farmer with two full-time employees. Joe applied for and was approved for a PPP loan.  The loan proceeds were distributed to Joe on April 15, 2020.   Joe kept both of his employees fully employed during the coverage period.  Joe qualifies to file for PPP loan forgiveness using SBA Form 3508EZ. 

Since Joe’s PPP loan was distributed before June 5, 2020, he could elect to use either an eight-week covered period or a 24-week covered period.  If Joe uses the 24 week covered period he will receive greater PPP loan forgiveness than he would if he used the eight week covered period.  Thus, Joe elects to use the 24 covered week period.

PPP Calculation

The amount of Joe’s PPP loan was $30,000.

Joe calculated his original PPP loan as follows:

Joe’s 2019 Schedule F                                    $70,000

Joe’s total payroll for 2019                

    ($32,000 salary x 2 employees)                  $64,000

Health Insurance Expense for Joe’s

     Employees  ($5,000 per employee)            $10,000

Net 2019 Schedule F ($70,000) plus 2019 payroll ($64,000) plus Employee Health Insurance Expense ($10,000) = $144,000.

$144,000 divided by 12 months times 2.5 = $30,000.

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

Forgiveness Application

Please see the 3508EZ instructions when completing the top portion of the form.  Please note that if the borrower received an EIDL (Economic Injury Disaster Loan) Advance, that amount, along with the EIDL application number must be reported on the appropriate lines.  The amount of the EIDL advance is not eligible for PPP forgiveness.  If the borrower has both an EIDL advance and a PPP loan, SBA and the borrower’s lender will adjust the forgiveness amount at the time of PPP loan forgiveness processing.

In this example, Joe Farmer pays his employees on a bi-weekly basis.  Because Joe pays bi-weekly, he is eligible to utilize an alternate payroll coverage period.  Using an alternate payroll period allows Joe to change the coverage period to better mesh with his bi-weekly payroll during the eight or 24 week coverage period. Typically, the coverage period would be from April 15, 2020, through September 30, 2020.  The bi-weekly pay period for Joe’s employees that includes April 15, 2020, ends on April 22, 2020.  Joe may use an alternate coverage period for his PPP loan that begins on the same date as his payroll cycle.  Joe’s coverage period will start on April 23, 2020 (the first day of bi-weekly payroll cycle) and run through October 8, 2020.  This alternative payroll covered period will still get Joe his 24 weeks of coverage.  See SBA’s 3508EZ instruction for more details.

For borrowers that received a PPP loan in excess of $2 million, they must check the box.  SBA and the U.S. Department of the Treasury have indicated that all loan amounts of $2 million and higher will be audited. 

Figure 1: Snapshot of Joe Farmer PPP Forgiveness Application

Line 1

Line 1 of the forgiveness application includes salaries and self-employment income.  Since Joe is using the 24-week covered period, all reported expense needs to be within the 24-week timeframe.

Employee Payroll

Both of Joe’s employees are paid a salary of $32,000 each ($64,000 total).

Both employees are also provided with health insurance at $5,000 each ($10,000 total).

To arrive at Joe’s total payroll expense for the covered period, Joe adds up the gross payroll amounts for all paychecks that occurred during his coverage period of April 23, 2020, to October 8, 2020. 

The cash wages paid to Joe’s employees during the covered period was $29,538.  Joe also provides health insurance to both of his employees.  His annual cost for the employee’s health insurance is $10,000.  The amount of health insurance cost incurred during the 24-week coverage period was $4,615.  Joe adds his cash wages and the cost of his employee’s health insurance during the 24-week coverage period, which is $34,153 ($29,538 plus $4,615).

Employee Benefits: The total amount paid by the borrower for: 1.      Employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees. Do not add employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation. 2.      Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation, and contributions on behalf of owner-employees are capped at 2.5 months’ worth of the 2019 contribution amount. 3.      Employer state and local taxes paid by the borrower and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings.  Please note that most farmers are excluded from paying Federal and State unemployment.

Owner Compensation

To determine Joe’s self-employment income, Joe must look at his 2019 Schedule F.  Self-employment income is pulled from the previous year’s tax return. 

Joe’s 2019 Schedule F = 70,000

However for owners, we cannot just simply take 24 weeks’ worth of compensation.  According to SBA “for a 24-week Covered Period, the 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).” For Joe, compensation is capped at 2.5 months’ worth of his 2019 compensation, which is $70,000 divided by 12 and multiplied by 2.5 = $14,583.

Total payroll costs for Joe will be a combination of his payroll expense for the 24 week covered period ($34,153) plus his self-employment income for 2.5 months ($14,583) = $48,736.

KEY POINT 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, 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,” for six years after forgiveness or repayment of the loan. Further, the rule requires a borrower to provide any such documentation if requested by the SBA during this six-year period, thus reserving the right to review a PPP loan for up to six years after the loan is no longer outstanding.

Line 2

Enter the amount of business mortgage interest payments paid or incurred during the covered period for any business mortgage obligation on real or personal property incurred before February 15, 2020.  Do not include prepayments.

In Joe’s case, he had a $500 interest expense from a loan payment during the covered period.

Line 3

Enter the amount of business rent or lease payments paid or incurred for real or personal property during the Covered Period, pursuant to lease agreements in force before February 15, 2020.

Joe paid $7,500 for a qualifying lease during the covered period.

Line 4

Enter the amount of business utility payments paid or incurred during the covered period, for business utilities for which service began before February 15, 2020.  See SBA’s 3508EZ instructions for a detailed list of qualifying expenses.

Joe paid $4,300 of utility costs during the covered period.

Lines 5-8

Line 5 is the sum of lines 1-4, $62,833. 

Line 6 is the original PPP loan amount, $30,000.

Line 7 determines whether at least 60% of the potential forgiveness amount was used for payroll costs.  Divide the amount on line 1 by 0.60, and enter the amount, $81,227.

Line 8 Enter the smallest of lines 5, 6, or 7. Note: If applicable, SBA will deduct EIDL Advance amounts from the forgiveness amount remitted to the lender, $30,000.

In this example, the forgiveness amount is equal to the PPP loan.  Joe gets 100% loan forgiveness and does not have to repay any of the original PPP loan. 

In addition to page one of SBA Form 3508EZ, Joe must complete page two.  Page two of the forgiveness application is the sign-off page for loan forgiveness.  Borrowers must read each of the ten statements on page two and, if in agreement, initial the aforementioned statements.  The borrower also must sign and date the application before submission to their lender.  By statute, the lender has 60 days to review the application.

Page three of the Form 3508EZ application is for collection of demographic information.  Completion of page three is optional.

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.