Self-Employed Forgiveness Calculation Steps
Resources
AICPA logo
Cart
searchSearch
search
burger
AICPA logo
  • Home
abstract purple blue background
Resources

Self-Employed Forgiveness Calculation Steps

4 months ago · 5 min read

As self-employed individuals who received a Paycheck Protection Program (PPP) loan look forward to maximizing their loan forgiveness, the following outlines the steps to take to calculate the amount of the PPP loan eligible for forgiveness. Look over these steps now to prepare for maximum loan forgiveness at the end of the covered period.

Self-Employed with No Employees

Track total eligible costs incurred and paid during the covered period following the loan funding

  • Owner compensation replacement

    • 8-week covered period: Limited to the lesser of 8/52 of 2019 net profit (2019 Form 1040 Schedule C, line 31) or $15,385*

    • 24-week covered period: Limited to the lesser of 2.5/12 of 2019 net profit (2019 Form 1040 Schedule C, line 31) or $20,833*

  • Mortgage interest on real or personal property

    • For mortgages in effect prior to 2/15/2020

    • Limited to the extent it was claimed or entitled to be claimed on your 2019 Schedule C

    • Payments to a related party are limited to the mortgage interest owed on the property during the covered period

  • Rent/lease payments on real or personal property

    • For agreements in effect prior to 2/15/2020

    • Limited to the extent it was claimed or entitled to be claimed on 2019 Schedule C

    • Payments to a related party are limited to the mortgage interest owed on the property during the covered period

  • Utilities

    • Includes payment for electricity, gas, water, transportation, telephone, or internet access.

    • Service must have been established prior to 2/15/2020

    • Limited to the extent it was claimed or entitled to be claimed on 2019 Schedule C

Self-Employed with Employees

Step 1

Track total eligible costs incurred and paid during the covered period following the loan funding

  • Owner compensation replacement

    • 8-week covered period: Limited to the lesser of 8/52 of 2019 net profit (2019 Form 1040 Schedule C, line 31) or $15,385*

    • 24-week covered period: Limited to the lesser of 2.5/12 of 2019 net profit (2019 Form 1040 Schedule C, line 31) or $20,833*

  • Payroll costs

    • Compensation to employees including such items as:

      • Salary, wages, commissions or similar

      • Cash tips or the equivalent

      • Payment for leave

      • Allowance for separation or dismissal

      • Housing allowance or stipend

      • Payments for group healthcare benefits including group health care coverage*

      • Payment of any retirement benefits

      • Payment of state and local taxes assessed on the compensation of employees

  • Mortgage interest on real or personal property

    • For mortgages in effect prior to 2/15/2020

    • Limited to the extent it was claimed or entitled to be claimed on 2019 Schedule C

    • Payments to a related party are limited to the mortgage interest owed on the property during the covered period

  • Rent/lease payments for real or personal property

    • For agreements in effect prior to 2/15/2020

    • Limited to the extent it was claimed or entitled to be claimed on 2019 Schedule C

    • Payments to a related party are limited to the mortgage interest owed on the property during the covered period

  • Utilities

    • Includes payment for electricity, gas, water, transportation, telephone, or internet access.

    • Service must have been established prior to 2/15/2020

    • Limited to the extent it was claimed or entitled to be claimed on 2019 Schedule C

Step 2

Calculate any reduction in payroll > 25% of prior quarter

  • For any employee who did not receive, during any single pay period during 2019, wages/salary at an annualized rate of pay more than $100K.

  • Did their average annual salary or hourly wage during the covered period decrease by more than 25% from March 1, 2020 and March 31, 2020? Reduce forgivable amount by the reduction that exceeds 25%.

  • The borrower should only take into account decreases in salaries or wages:

    • A decrease caused by a reduction in hours will be ignored in this step as it will be picked up in Step 3.

    • A decrease in other forms of compensation including commissions and bonuses will be ignored.

  • Consider using the AICPA’s loan forgiveness calculator or PPPforgivenesstool.com to assist with this step.

Step 3

Calculate any % decrease in FTEs from the covered period versus the following periods:

  • February 15 through June 30, 2019 or, at the borrower’s election, January 1 through February 29, 2020

  • Seasonal businesses will use February 15 to June 30, 2019; between January 1 and February 29, 2020 or any consecutive 12-week period between May 1, 2019 and September 15, 2019

Step 4

Calculate any adjustment because FTEs and salary/wages were restored by December 31st, 2020*

  • If “restore” criteria are met, the decreases in steps 3 and 4 are ignored.

Step 5

Calculate payroll costs for forgiveness floor

  • 60% of eligible costs are to be used on payroll

  • If less than 60%, the forgiveness is reduced

*Exceptions for FTE Reductions and Safe Harbors

  • Exceptions for FTE reduction provided if borrower documents an inability to:

    • Rehire individuals who were employees or restore hours of the eligible recipient on February 15, 2020; and

    • Hire similarly qualified employees for unfilled positions on or before December 31, 2020: or

    • Return to the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued…related to COVID-19. (see language in the Paycheck Protection Program Flexibility Act of 2020)

  • FTE Safe Harbor 1: Borrowers unable to operate at the same level between 2/15/20 and the end of the covered period because of guidance issued by government agencies will not receive a reduction in forgiveness for a decrease in FTEs

  • FTE Safe Harbor 2: Borrower will not receive a reductions in forgiveness if a) they reduced their FTEs in the period beginning 2/15/20 and ending 4/26/20; and b) they restored FTEs no later than the earlier of the application date or 12/31/20 to the same level as the pay period that included 2/15/20.

**Additional considerations:

  • Borrowers who received loans prior to June 5 have the option of an 8-week or 24-week covered period while all borrowers from June 5 on have a 24-week covered period.

  • As a reminder, the CARES Act excludes from payroll costs:

    • Annualized salaries greater than $100K

      • $15,385 for 8-week covered period

      • $46,154 for 24-week covered period

      • $20,833 for 24-week covered period for owner-employees

    • Taxes imposed or withheld under chapter 21,22, or 24 of the IRC of 1986 (e.g. the employer’s share of FICA and Medicare are not included as payroll costs)

    • Compensation of any employee whose principal place of residence is outside the US

    • Qualified sick or family leave for which a credit allowed under §7002 or §7004 of the FFCRA

    • Payments to Independent Contractors

    • Employer health insurance contributions are not included for self-employed individuals, general partners, or employee-owners of an S-Corp

    • No additional forgiveness is provided for retirement for self-employed and general partners

    • General Partners capped at .9235 of SE earnings

  • Borrowers who received a loan of $50,000 or less can use the streamlined SBA Form 3508S loan forgiveness application

  • Payroll providers are developing PPP-compliant reports to track both payroll and benefits

  • New EZ loan forgiveness application applies to borrowers that:

    • Are self-employed and have no employees; or

    • Did not reduce salaries or wages of their employees by more than 25%, and did not reduce the number of hours of their employees; or

    • Experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

  • Some lenders are requiring PPP loan proceeds be put into a separate bank account. When the application for loan forgiveness is completed, the documentation such as payroll reports, payroll tax returns, canceled checks, receipts, account statements or other documentation of payments will be required to be retained for six years. Disbursing eligible costs from a separate account may assist in the documentation process.

  • Additional guidance may be issued by the SBA so please revisit this document regularly for updates.

What did you think of this?

Every bit of feedback you provide will help us improve your experience

Mentioned in this article

Topics

COVID-19

Subtopics

CARES Act
Manage preferences

Related content