PPP Math for the Self-Employed: And, Yes, There is Still Time

The Small Business Administration reports that as of May 23 it still had nearly $150 billion of untapped Paycheck Protection Program funds. The Program has been underutilized by self-employed business owners, in part due to complexity. Those micro-businesses, however, make up a significant slice of the U.S. economy and generally would be eligible for PPP funding.

This article illustrates potential PPP benefits for a self-employed owner with no employees. If you are employed through your S corp or C corp, this article is not for you. But if you have been doing business as a sole proprietor or through a solely-owned LLC that is disregarded for tax purposes, and if you report business income on Schedule C of your Form 1040 income tax return, then you may want to pay attention.

THE POTENTIAL LOAN AMOUNT. To calculate your potential loan amount:

• Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value).
  • If your Schedule C for 2019 shows a loss or breakeven for your business, then you are not eligible for a PPP loan.
  • If your Schedule C for 2019 shows more than $100,000 of net profit, ignore the portion over $100,000 but you are still eligible on that first $100,000.
  • If your business was not in operation during 2019 but was in operation on February 15, 2020 and if you expect to report net income on Schedule C to your 2020 income tax return, SBA has promised – but not yet issued – guidance for your situation. Stay tuned …
• Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).
  • If the business is seasonal and your income fluctuates significantly from quarter to quarter, it appears that you are stuck with the monthly average. SBA guidance about seasonal businesses does, however, suggest the possibility of a different outcome. So stay tuned …
• Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.
• Step 4: If you received an Economic Injury Disaster Loan (EIDL) between January 31, 2020 and April 3, 2020, you can add that amount to Step 3. What you are doing here is using PPP funds to refinance the EIDL. The EIDL grant portion (called an “advance”) cannot be included here, in that it does not have to be repaid.

The resulting figure is your maximum loan amount. We refer to this as a “loan,” but in reality all or most of your PPP loan will likely be forgiven – which makes this an attractive proposition for many self-employed owners. Beware, however, of the following hurdles that could keep you from qualifying:

Past Sins. You generally will not qualify for a PPP loan if the answer to any of the following questions is “Yes”:

• Prior Delinquencies. Have you, or any business owned or controlled by you, ever obtained a direct or guaranteed loan from the SBA or any other Federal agency that is currently delinquent or has defaulted in the last 7 years and caused a loss to the government?
• Felony Convictions. Within the last 5 years, have you been convicted of any felony including any plea of guilty or nolo contendere, or have you been placed on pretrial diversion or on any form of parole or probation for a felony?
• Pending Criminal Proceedings. Are you now subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges have been brought against you in any jurisdiction, or are you presently incarcerated or on probation or parole?

Part-Time Resident. If the United States is not your principal place of residence, then you will not qualify.

Discontinued/Dormant Business. Generally, you need to provide documentary evidence that you were in business on or around February 15, 2020. If, however, you can establish that your business is seasonal and was therefore dormant in February, then you should still qualify if you can demonstrate that you had 8 weeks of operation sometime during the 4.5 month period from May 1 through September 15, 2019. (Whether those 8 weeks need to be consecutive is presently unclear.)

No Good Faith Need for Funding. The application form requires you to certify, under penalty of law, that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” If your business is not adversely affected by recent disruptions in the economy or if you have plenty of other sources of liquidity, then you likely would not be able to make that statement. Recent SBA guidance says that, “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” This appears to be a quasi-waiver of the certification requirement, but intentional misrepresentations in that regard would still be inappropriate and inadvisable.

THE FORGIVENESS CALCULATION. Assume that you do indeed qualify for, and receive, a PPP loan in the amount of 2.5 times your average Schedule C income for 2019 (ignoring amounts earned in excess of $100,000 in that year). For a business with no employees other than yourself, you should easily be able to achieve at least 75% forgiveness of your PPP loan.

The maximum forgiveness amount starts with the total amount of qualifying expenses you incur and pay within an 8-week period that begins on your loan funding date. These include the following:

• Make sure to pay yourself as compensation an amount equal to your total Schedule C income for 2019 multiplied by 8 and divided by 52, but (due to the $100,000 cap) no more than $15,385 for the period as a whole. This should amount to 75% of your total loan amount (8 weeks out of 2.5 months is 56 days divided by 75 days, or 74.7%).
• If your business pays for utilities (electricity, internet, etc.) under service agreements that predate February 15, 2020, make sure to pay 8 weeks’ worth of utilities within the 8-week period.
• If you have business rental expense (such as office rent or an equipment lease) under rental agreements that predate February 15, 2020, make sure to pay 8 weeks’ worth of those rental payments within the 8-week period.
• If you have business mortgage interest or equipment loan interest under loan agreements that predate February 15, 2020, make sure to pay 8 weeks’ worth of those interest accruals within the 8-week period.

THE FORGIVENESS REDUCTIONS. The maximum forgiveness amount is then subject to complicated reductions for a drop in headcount and for more than a 25% reduction in salary rates. But if you are the only employee and if you use the PPP loan to fund compensation payments to yourself, then there likely is no drop in headcount and no reduction in salary rate. So count yourself fortunate here that you don’t have to learn the intricate rules surrounding forgiveness reductions.

POSTSCRIPT. If you have structured your self-employment through your own S corp or C corp, then you will count yourself as an employee and your compensation will be limited to what you labeled (and paid payroll tax on) as your salary. If the corporation has other employees as well, then the PPP calculations get pretty complicated pretty fast. Welcome to the realities of this emergency program. If 2.5 times total average monthly payroll for 2019 is an attractive amount, though, it will be well worth your while to learn the intricacies of PPP.