When the coronavirus pandemic began, there sure was a lot that went wrong with the Small Business Administrations’ Paycheck Protection Program (PPP) a.k.a. the Cares Act passed by Congress, wasn’t there? 

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• The first round of funding was snatched up so fast that many small businesses were left out in the cold.
• Not to be caught off-guard again, small businesses flooded the SBA site when funding again became available and the site crashed.
• Unbelievably, even though there are more than 10 million self-employed freelancers, sole proprietors, solopreneurs, and independent contractors in the U.S., they were not even eligible for the first round of PPP loans.

Maybe even more odd was the fact that some businesses/business people that applied for, and received, PPP funds clearly didn’t fit the intent of the program:

The Los Angeles Lakers? Shake Shack? Kanye West? Yep.

How were these folks legitimate borrowers? How were they eligible to get PPP loan funds? Talk about rubbing salt into the wound.

And yet, despite all of that initial bad news, once the loan program gained some traction, the kinks were ironed out, changes were made and eligibility increased. For us, the best of these changes was that later rounds of PPP funding allowed the self-employed to get in on the assistance, even though many did not have actual “payroll” per se.

To say that the country’s tens of millions of freelancers, independent contractors, and self-employed small business owners needed to be able to use such loan proceeds would be a vast understatement. The Covid pandemic changed everything as self-employment income dried up and many small entrepreneurs struggled mightily.

The good news is that a lot of them finally got that help and now, as the pandemic recedes, it’s time to get those PPP loans either repaid, or—better!—forgiven. Here’s how:

Do You Qualify for PPP Loan Forgiveness?

As a reminder, to get loan forgiveness, your PPP loan had to be used for very specific purposes—either to pay your own salary or for very specific non-payroll expenses such as mortgage interest, rent, utilities, loan payments, etc. Eligible expenses are quite strict.

But of course, this being the government and all, the specifics as to how you had to use the money, and therefore whether you qualify for full forgiveness, is quite a bit more complicated than these generalities, so let’s dive in.

For the self-employed, forgiveness is based on the following:

• At least 60 percent of the loan had to be used for salary, compensation, payroll. That said, self-employed individuals were legally allowed to use up to 100 percent of their PPP money on payroll for themselves if they so chose (although if you don’t run “payroll” per se, you can still be covered, see below).
• The other 40 percent had to be spent on legitimate business expenses such a mortgage, mortgage interest, rent, health insurance, insurance premiums, utilities for your office, operations, supplier costs, protective gear, or damages caused by riots that were not covered by insurance.
• The loan proceeds also needed to be used during the so-called “covered period”—between eight and 24 weeks after receiving the funds (it depends on when you applied).

You are eligible to apply for loan forgiveness the day after your covered period ends and for the 10 months thereafter. After 10 months, you have to start paying interest on any unforgiven part of the amount of loan, so it would behoove you to apply for forgiveness as soon as you are eligible. For people who applied early on in the program (i.e. in April 2020 and for a covered period of eight weeks) your deadline to apply for forgiveness is some time in mid-July 2021. 

The good news is that solopreneurs who took out the maximum loan amount, which was 2.5x their average monthly income, are ensured full loan forgiveness if they qualify. Qualification occurs when you meet these four requirements:

1. You are self-employed and filed a Schedule C in your 1040 tax return, showing self-employment income.
2. Your business was operating on February 15, 2020.
3. You meet the above requirements, and
4. Your primary residence is the United States.

Calculating Your Maximum Loan Forgiveness Amount

While larger small businesses were eligible for larger PPP loans, the maximum a self-employed individual with no employees or payroll could get from the loan program was $20,833. That amount was calculated this way:

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• The maximum possible applicable self-employed income was $100,000 (this is the max applicable, even if you made more). 
• The average monthly income for someone making $100,000 is $8,333.
• Self-employed loan amounts were based on 2.5 times average monthly income. So, for someone making $100,000 (or more), the maximum PPP loan was $8,333 x 2.5, which is $20,833.

This number is important as it turns out to also be the maximum amount you, the sole-proprietor, can get forgiven. 

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To figure out how much of your loan can be forgiven, follow these steps:

1. Look at your 2019 or 2020 IRS 1040 Schedule C (depending on when you got your loan). 
2. Look at Line 31 (Net Profit or Loss). If it is more than $100,000, as indicated above, use $100,000.
3. Divide that number by 12.
4. Multiply that number by 2.5.

That third step calculates your average monthly revenue and the fourth step gives you your maximum PPP loan forgiveness amount—2.5x your monthly average. On $100,000, that number is $20,833. 

Note: The above number is also known in the lingo as “owner’s compensation share.” If you do not run payroll, your owner’s compensation share would likely be that $20,833 number. However, if you do run payroll, the calculation is a bit more complicated. It looks like this:

• Take your gross income (Line 7 of your 1040).
• Subtract payroll expenses / payroll costs (lines 14, 19, or 26 of your Schedule C).
• Multiply that by .208.

If you are having a difficult time calculating this, Intuit has a great forgiveness calculator called AidAssist that you can use.

Let’s look at two examples to better understand how to calculate your forgiveness amount:

Example 1: Let’s say that Jen is a self-employed photographer who made $125,000 in 2019. She has no employees and works out of her house. Line 31 of her Schedule C says her net profit was $125,000. Because it is over the $100,000, Jen is maxed out at $100,000 for PPP loan purposes. Her loan forgiveness amount would be that same $20,833 number, which is $100,000 divided by 12 months, times 2.5 ($100,000 ÷ 12 = $8,333.33. $8,333.33 x 2.5 = $20,833).

Example 2: River made $75,000 in 2019. Divided by 12, his average monthly income was $6,250. Multiply that by 2.5, and River’s loan forgiveness amount is $15,625.

The PPP Loan Forgiveness Application Process

To get your loan forgiven as a solopreneur, you can visit SBA's Direct Forgiveness Portal to submit your application (as long as your lender has opted in). After filling out some basic information, most of your loan information will self-populate on the form, and you'll sign it using DocuSign. You can submit it right there on the portal and the SBA will begin processing your application. This handy guide can walk you through the process. Note: to use SBA's portal, your loan had to be less than $150,000.

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You can also apply for forgiveness directly with your lender. You'll need to fill out one of three forms—either Form 3508S, 3508 or the EZ application. But which form is best for you? Well, of course you would likely prefer the EZ application based on name alone, right?

Wrong.

As it turns out, the EZ application is, ironically, the less easy application (again, this being government and all). But even so, both are fairly simple.

Form 3508S Forgiveness Application: This form is for people who either:

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• Received a loan of $20,833 or less, or
• Received loans bigger than the $20,333 amount, but not more than $150,000. This would occur where, for example, a person is self-employed (i.e., they have not incorporated or formed an LLC), but has employees. In that case, they would have applied for a PPP loan that covered their employee payroll as well. Their loans would be substantially more than the self-employed solopreneur’s $20,833.  

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So, you would use this form if your PPP loan amount was $150,000 or less. 68 percent of all self-employed loan applications fell into this bucket. The 3508S is great because it requires fewer calculations and less documentation. (Note: You can use this form for both first and second draw PPP loans, as long as they have not yet been forgiven.)

You can find the SBA’s directions for filling out the application here, but let’s walk through the process:

1. Fill out your business information. Here you will list your business’ legal name, dba, address, EIN, etc.
2. List your PPP loan information: Loan number, loan amount, lender, disbursement date, etc.
3. List your requested loan forgiveness amount: Fortunately, you do not need to show your calculations for the amount you are requesting because it is a fairly straightforward analysis, based upon your loan amount. Often, the amount you seek to be forgiven will equal your loan amount because the self-employed’s maximum loan amount is the same as their maximum forgiveness amount—$20,833
4. Initial the boxes: You will need to verify by your initials that you used the funds for authorized purposes, are not committing fraud, etc.

Don’t forget to sign and date it. Voila! You’re done.

Form 3508EZ Loan Forgiveness Application: The EZ loan application is, needless to say, more complicated. You would use it if your loan amounts are more than $150,000 personally, or more than $2 million with affiliates—and you did NOT reduce your full-time employee (FTE) headcount or wages by more than 25 percent (if you did, see Form 3508). Also note: As almost all small businesses that have FTEs are incorporated, and they would not be considered “self-employed.”

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Once you fill out business and loan information, you will then need to itemize your payroll and non-payroll expenses, such as:

• Business Mortgage Interest Payments
• Business Rent or Lease Payments
• Business Utility Payments
• Covered Operations Expenditures
• Covered Supplier Costs

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The calculation you will need to make for this form is: 1.) The number of full-time employees at the time of the loan, 2.) the number of full-time employees at the time of the forgiveness application, and 3.) your total payroll for the forgiveness timeframe. This will help you figure out your “potential forgiveness amounts.”

The next step is the same as with the 3508S, and is equally key. You will need to certify that you filled out the loan forgiveness form accurately and honestly by initialing each paragraph. Making a false statement in order to, say, dupe the treasury or the SBA in order to get a higher loan amount forgiven, is legally and financially dangerous. Fines and even imprisonment are possible.

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Form 3508 Loan Forgiveness Application: There is also a third form, the general 3508. And this is for folks who received a loan of more than $150,000 AND reduced their FTE headcount or wages by more than 25 percent. 

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Filling out form 3508 takes more time but is nevertheless straightforward. It begins as the other two forms do with a recitation of the business and loan particulars. Then you go into the calculations: List your payroll and non-payroll costs and list FTE reductions. (The “Schedule A” and its worksheet help you specify and calculate these numbers.)

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The form specifically has a calculation table that helps determine how to correspondingly adjust the amount of loan forgiveness. Almost always, an employer with FTEs has incorporated and so, as such, the form would be inapplicable to the self-employed.

The real difference between the three forms is in the amount of calculations you will need to do. The 3508 requires the most, 3508EZ is less, and 3508S has almost none.

Questions and Answers (FAQs) 

Can home office expenses be forgiven? If these non-payroll costs fit the categories above—that is, if they are for rent, office utilities, mortgage interest and so on, then yes, net income home office expenses can be forgiven.

Do you need documentation to get loan forgiveness? For the owner’s compensation share, you would only need to provide your 2019 or 2020 Schedule C. If you are self-employed and have payroll expenses or other covered costs, you will need to prove these costs.

Needless to say, good record-keeping and proper documentation is key to getting loan forgiveness and handling any lender or SBA audit that may later occur.

What if my loan amount was bigger than the amount that can be forgiven? Let’s say that your loan amount was $25,000 but that you are maxed-out at the $20,833 forgiveness number. The difference—$4,167, will need to be repaid according to the terms of your PPP loan. But at 1 percent interest, it is still a pretty darned good deal.

Are PPP expenses tax deductible for the self-employed if they are forgiven? Yes. PPP expenses are both forgivable and deductible, and, even better, whatever amount is forgiven will not be considered to be part of your taxable income. 

So go ahead, thank the SBA for finally getting it right: file for forgiveness, file your IRS forms, and let's put this damn pandemic behind us!