SBA Finally Clarifies PPP Loan Forgiveness Rules: Full Forgiveness For Self-Employed Borrowers


Jovita Carranza, Administrator US Small Business Administration, testifies during the Senate Small … [+] Business and Entrepreneurship Hearings to examine implementation of Title I of the CARES Act on Capitol Hill in Washington, DC on June 10, 2020. (Photo by KEVIN DIETSCH / various sources / AFP) (Photo by KEVIN DIETSCH/AFP via Getty Images)

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If you’re a freelancer or other self-employed person wondering if you’ll get forgiveness for loans taken out under the Paycheck Protection Program (PPP), yesterday brought good news. The SBA filed its 19th  Interim Final Rule (IFR), scheduled to be published on Friday June 19th, focusing on revisions made from Paycheck Protection Program Flexibility Act (Flexibility Act) signed into law on June 5th.  The unpublished version of the update ensures full forgiveness for self-employed, freelancers and independent contractors who took the maximum loan amount based on 2.5 times their 2019 monthly income. (Under previous rules, the eight-week limitation made it hard to get above the 75% payroll threshold.) Here’s what you need to know. 

Changes made by the Flexibility Act 

The Flexibility Act made a few key changes to the PPP Program: 

  • For loans made after June 5th, it extended the maturity date of the loan from two years to five years.  The maturity date can also be extended for loans made before June 5th, if the borrower and lender mutually agree.
  • The covered period for the loan forgiveness was extended from eight weeks to 24 weeks. However, borrowers with loans taken before June 5th can still choose the eight-week period. 
  • The Act reduced the amount that you needed to spend on payroll in order to obtain forgiveness from 75% to 60%.  Originally, the Act made it sound like if you didn’t get to 60% in payroll expenses, you didn’t get any forgiveness. However, the SBA and Treasury later clarified even if you didn’t get to 60% in payroll expenses you could still obtain partial forgiveness. 
  • The Act extended the date to replace full-time equivalent employees (FTEs) and restore salaries from June 30, 2020 until December 31, 2020.  It also allowed relief for those businesses that have a loss of FTEs because of Covid-19 related restrictions that prevent the same level of business activity through the end of the year. This is a significant help to those businesses who still have not been able to fully reopen because of stay-at-home restrictions.

All of these adjustments were welcome and exciting news. But the SBA didn’t specify how they would work until yesterday. The newest IFR gave additional insight on how to calculate owner compensation, employee compensation and non-payroll costs. 

Owner compensation 

The newest IFR shows us how to calculate owner compensation under the new rules. It’s either: 

  • Eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 
  • 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period.” 

This does exclude any qualified sick leave equivalent amount claimed under the Families First Coronavirus Response ACT (FFCRA). For those of you filing a schedule C, the first option is the same it has always been – 2019 Schedule C line 31/52 * 8.  The second option should also look familiar because that’s how you calculated the maximum amount of your loan (2019 Schedule C line 31/12 * 2.5).  So, in short, if you are choosing the 24-week covered period option, you will get full-loan forgiveness. 

As always, the additional guidance answers some questions and raises others. In the rationale for the rule, the SBA specifically mentions “owner compensation replacement for individuals with self-employment income who file a Schedule C or F” but doesn’t mention the owner-employees (e.g, S-Corp owners).  

Presumably, the $20,833 cap applies to them, too, since the current Schedule A on the application lumps owner-employees, self-employed individuals, and general partners together. Even so, it’s confusing why they weren’t mentioned here. 

Employee Compensation 

The 24-week extension also increased the amount eligible for forgiveness to business owners with employees. The payroll costs including salary, wages and tips is still capped at $100,000 of annualized pay. But now instead of $100,000/52 * 8 (a max of $15,385 per individual), you get up to $100,000/52 *24, making the new maximum forgiveness cap $46,154 per individual for 24 weeks. 

Keep in mind the payroll costs also include covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums). 

Non-payroll expenses 

Lastly, the loan forgiveness amounts for non-payroll expenses have also been extended to 24 weeks, making it much easier to meet loan forgiveness thresholds. As a reminder, non-payroll expenses include: 

  • covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020
  • covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 
  • covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation

The “incurred or paid” rule still applies. So, you can count expenses that were incurred or paid within that 24-week period, which means you’ll likely get some expenses that fall outside of the 24-week covered period as well. 

What we’re still waiting on 

The new clarification means that self-employed PPP borrowers can breathe a sigh of relief.  There’s more certainty now for those who don’t have employees and took out a loan based on 2.5 times 2019 monthly income. Entrepreneurs with employees also got some relief with the extended calculation clarification. But we’re still waiting for the updated application and more detail on how the application process will work. Banks are already pushing back on how much work will be involved

Still if you’ve been holding off on applying because you weren’t sure about loan forgiveness, this guidance is good news.  Even better, there’s still time to put it to work. You have until the end of the month to apply for PPP funding. There’s still some $146B left in the second round of the program funding as well.  

On a similar note, the SBA opened the Economic Injury Disaster Loans (EIDL) application on Monday to all businesses again. So, if you’re still looking for funds to get you through this time, this could be another source. Before you do, make sure to read about the particulars of EIDLs here

As always, I’ll keep you updated with the changes that are sure to come.

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