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Self-Employed PPP loans
Self-Employed PPP loans
Increased loan amounts & a priority processing window for self-employed individuals through March 9 means there’s never been a better time to apply for a forgivable PPP loan
March 2021 * 10 min read

With the approval of the $900 billion COVID-19 aid package that Congress passed in late December 2020, $284 billion was ear-marked for loans to support small businesses through the Small Business Administration’s COVID-era Paycheck Protection Program (PPP).

As part of this second wave of relief, the Small Business Administration (SBA) has recently issued new guidance on the availability and terms of PPP loans for self-employed individuals. These new rules cover freelancers, independent contractors, and sole proprietors—essentially anyone who files a Schedule C come tax season.

Under this new guidance, self-employed individuals whose business(es) have been operational as of February 15, 2020 will be eligible for larger forgivable loan amounts, due to a change in how max loan amounts are calculated. Instead of getting 2.5 times net average monthly income (income minus expenses), sole proprietors will now be eligible for up to 2.5 times their gross average monthly income. This significantly increases the loan size most self-employed individuals are eligible for.

Example. Andrew’s 2020 Schedule C shows a $60,000 gross income on line 7. His 2020 expenses totaled $20,000. Under the old loan amount calculation, Andrew would have received ($60,000 - $20,000) ÷ 12 * 2.5 = $8,333 in forgivable PPP loan funds.

However, under the new loan amount calculation, Andrew would calculate based on his gross, not net post-expenses, income and so he would receive $60,000 ÷ 12 * 2.5 = $12,500 in forgivable PPP loan funds.

If you are self-employed and your income has been impacted by COVID-19, read below to understand whether you might be eligible for a forgivable PPP loan, how to apply online leveraging your Schedule C, and what constitutes fully-forgivable uses for the loan proceeds.

If you think you are eligible, it is important to act fast as loan applications close March 31st. The SBA has created an exclusive processing window for businesses with less than 20 people from February 24 - March 9, 2021, so applying during this window will increase the chances your application is processed, approved, and the funds disbursed to you faster.

PPP Loan Details

PPP loans are fully-forgivable loans aimed at helping small businesses and self-employed individuals weather the financial turmoil that has been brought about by COVID-19.

While PPP loans have an interest rate of 1% and a loan term of 5 years, if spent on qualifying business expenses (read more below) PPP loans are fully forgivable, which means you do not need to repay the loan. While filing for loan forgiveness is a separate process, it is relatively straightforward and we detail it below.

It is important to note that PPP loans are also federal income tax-free and all business expenses paid for with the proceeds from your PPP loan are federal income tax-deductible. However, some states have their own rules for PPP loans at the state income tax level. For more specifics on your state's policy, see this article.

PPP Loan Eligibility

PPP loans are meant to be a broad-sweeping relief program for small American businesses, so qualifying for a loan is relatively straightforward. Eligibility requirements are slightly different depending on whether this is your first (“First Draw”) or second (“Second Draw”) PPP loan. Similarly, the amount of loan funds you are eligible for depends on whether this is your first vs. second PPP loan.

If this is your first PPP loan ("First Draw")

To qualify for a First Draw PPP loan, you must meet the following requirements:

  • Your business (or self-employment) must have been operational before February 15, 2020
  • Your business (or self-employment) must still be operational
  • You must not have more than 500 employees

If you are a self-employed sole proprietor with no employees who files a Schedule C with the IRS, your maximum PPP loan amount is 2.5 times your average gross monthly income for 2019 or 2020.

Here’s how to calculate this:

Step 1. Go to either your 2019 or 2020 Schedule C and find your gross income on line 7. Note that the max gross income that can be claimed is $100,000 (resulting in a PPP loan amount of $20,833), so if your income is more than $100,000, reduce it to $100,000 for the purposes of this calculation. If you have no income or show a loss, you will not be able to get a PPP loan.

If your books are up-to-date for 2020 in the Found app, you can find these inputs under the “Taxes → Schedule C” tab in your app menu.

Step 2. Divide your annual gross income by 12 to find your average monthly gross income

Step 3. Multiply your average gross monthly income by 2.5 to find your PPP loan amount.

Example. Margaret’s 2019 Schedule C shows a $90,000 gross income on line 7. Her average monthly gross income is $7,500. Her PPP loan is $18,750 ($90,000 ÷ 12 x 2.5).

If Margaret’s 2020 gross income was larger than 2019, she could qualify for a larger PPP loan. She should complete her 2020 Schedule C form from the IRS website and use that to apply. She does not have to file her 2020 Schedule C with the IRS first.

If you have two Schedule C businesses with no employees, you can file for a PPP loan for both, but your maximum forgiveness in total may not exceed $20,833 ($100,000 ÷ 12 x 2.5).

If you operate a hotel or restaurant, you can get a PPP loan of 3.5 times your gross monthly income, instead of 2.5 x income for other businesses.

If this is your second PPP loan ("Second Draw")

If you already received a PPP loan, you may be eligible for a second loan.

To qualify for a Second Draw PPP loan, you must meet the following requirements:

  • You’ve already used up all the funds from your First Draw PPP loan
  • Your business (or self-employment) must have been operational before February 15, 2020
  • Your business (or self-employment) must still be operational
  • You must not have more than 300 employees
  • You must be able to demonstrate at least a 25% drop reduction in gross income between comparable quarters in 2020 vs. 2019 (see below for details)

The rules and application procedure are essentially the same as for first-time PPP loans, with one major difference.

You can get a second PPP loan only if your business experienced at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

Example: Your business grossed $24,000 in the third quarter of 2019 and $18,000 in the third quarter of 2020. You will qualify for a second PPP loan, since this $6,000 difference is at least a 25% reduction.

You must compare the same quarters in 2019 and 2020, but it can be any quarter in the calendar year.

Application Process

To apply for a PPP loan, you will need the following items handy-

  • 2019 or 2020 tax returns (both if applying for a second PPP loan)
  • Federal Tax Identification Number
  • 2019 or 2020 Schedule C (see IRS template here, NOTE- the Schedule C worksheet in your Found app cannot be used for official PPP application purposes)
  • Or, if you have not yet filled out your 2020 Schedule C, 2020 income & expenses/ bank statements

You must apply for a PPP loan with an SBA-approved lender or other financial institution. To get matched with a lender, go through the Lender Match flow on the SBA website or view in-person lenders near you on a map. PayPal, Lendio and other FinTech firms are also processing PPP loans. The lender will submit your application to the SBA, who processes it and then sends the money back to your lender to disburse to you.

If you think you are eligible for a forgivable PPP loan, it is important to act fast as loan applications close March 31st. The SBA has created an exclusive processing window for businesses with less than 20 people from February 24 - March 9, 2021, so applying during this window will increase the chances your application is processed, approved, and the funds disbursed to you faster.

PPP Loan Forgiveness

Although PPP loans are called “loans”, they are fully forgivable if you satisfy some relatively simple legal requirements.

For PPP loans of $150,000 or less, the SBA has created a one-page forgiveness application form, Form 3508S here that you file with the lender who gave you your original loan. You can do this any time after you spend your loan proceeds, within 10 months of your 8 or 24-week spending period.

For larger businesses with employees, forgiveness can be complicated because a business must prove they spent at least 60% of the loan proceeds on employee payroll. The total number of employees on payroll must also be maintained.

The good news is you don’t have to worry about this if you are self-employed, with no W2 employees. In this scenario, PPP loan forgiveness is actually pretty straightforward.

For a self-employed individual, “Payroll Costs” include all amounts you paid yourself as owner of your Schedule C business (which the SBA calls “owner compensation”), rent, mortgage interest, business-related software, supplier costs, or Covid-related worker protection measures.

When you're a sole proprietor with no employees, you will obtain 100% forgiveness if at least 60% of your loan amount goes toward paying yourself with a weekly or monthly "owner's compensation replacement" withdrawal of the loan funds equal to the weekly/monthly gross income you used to apply for your loan.

For a full list of forgiveness-qualifying expenses, see the SBA’s site here. It is of course very important to keep receipts of these qualifying expenses, so we recommend keeping your books up-to-date by depositing your loan in your Found account and using your Found card for automatic expense tracking to ensure that if you get audited, you can easily present all relevant documentation related to your PPP loan.

To get your PPP loan deposited into your Found account, simply enter your Found Account and Routing numbers into your PPP application. You can find these by going to the “Profile” side-menu in your app, tap on the “Business banking” tab, then select the “Direct deposit” option. Note: Found requires that you meet certain eligibility requirements in order to send your PPP loan to your Found account, and all loan payments must pass a compliance review. Not all loan payments are accepted. You can find Found's eligibility requirements here.

If you are applying for your second PPP loan, you must also provide proof of the 25% reduction in gross income for one quarter of 2019 compared with the same quarter in 2020. Your bank records will do the trick.

Have more questions you want answered? You can read more about PPP loans at the SBA website.

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