By: Colleen Lyons
April 16, 2020
On April 14, 2020, the U.S. Small Business Administration (“SBA”) issued an interim final rule (“IFR”) providing guidance for individuals with self-employment income who file a Form 1040, Schedule C and who are interested in applying for assistance under the Paycheck Protection Program. This new IFR supplements the First PPP Interim Final Rule as described in our earlier Client Alerts: SBA Issues Interim Final Rules and Final Form of Application for Paycheck Protection Program and Paycheck Protection Program Application Process and Guidelines Established.
Eligibility for Self-Employed Individuals
An individual with self-employment income reflected on Form 1040, Schedule C (“Schedule C”) may be eligible for a Paycheck Protection Program loan (PPP Loan) if:
- the business was in operation on February 15, 2020;
- the owner had self- employment income as an independent contractor or sole proprietor;
- the owner has a principal residence in the United States; and
- a Schedule C has been or will be filed for 2019.
Exclusion for Self-Employed Individuals who are Active General Partners
The IFR clarifies that if the source of an individual’s self-employment income is from services as a general partner of a partnership or limited liability company which is taxed as a partnership, the partnership and not the general active partner should file for the PPP Loan. In those circumstances, the self-employment income of the general active partners may be reported as payroll costs of the entity applicant, up to $100,000 annualized.
Determination of PPP Loan Amount
The IFR provides suggested methodologies to use to calculate the PPP Loan amount as follows:
Suggested Methodology if there are no employees:
- Find or determine the 2019 Schedule C net profit amount (Line 31). If this amount is over $100,000 reduce it to $100,000;
- Calculate the average monthly net profit amount by dividing by 12;
- Multiply the average monthly net profit amount by 2.5; and
- Add the outstanding amount of any Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any emergency advance under an EIDL COVID-19 loan.
Suggested Methodology if there are employees:
- Compute 2019 payroll by adding the following:
- Find or determine your 2019 Schedule C net profit amount (Line 31). If this amount is over $100,000 reduce it to $100,000; plus
- 2019 gross wages and tips paid to employees whose principal place of residence is in the United States using 2019 Form 941 Taxable Medicare tips and wages (line 5c- column 1) for each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare tips and wages; subtract any amounts in excess of $100,000 annualized and amounts paid to employees whose principal residence is outside of the US; and
- 2019 employer health insurance contributions (Schedule C, line 14), retirement contributions (Schedule C, line 19) and state and local taxes assessed on employee compensation.
- Determine the average monthly amount (divide total from Item 1 by 12);
- Multiply the average monthly amount by 2.5; and
- Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any emergency advance under an EIDL COVID-19 loan.
Application and Required Supporting Documentation
In addition to completing the Borrower Application Form (SBA Form 2483), the applicant will need to provide its 2019 Schedule C along with the 2019 Form 1099-Misc detailing non-employee compensation received (Box 7) and invoices, bank statements or books of record that establish the applicant is self-employed; in addition invoices, bank statements or books of record to establish applicant was in operation on February 15, 2020 will also be required. If the applicant has employees, it must also provide applicable Forms 941 (or other tax forms or equivalent payroll processing records), state quarterly wage unemployment insurance tax forms for 2019 and evidence of any retirement and health insurance contributions, if applicable.
Permitted Uses of PPP Loan Proceeds:
The proceeds of a PPP Loan are to be used only for the following:
- Owner compensation replacement, calculated based on 2019 net profit;
- Employee payroll costs if there are employees;
- Mortgage interest payments on any business mortgage obligation, business rent payments and business utility payments to the extent they were claimed as deductions on applicant’s 2019 Schedule C;
- Interest payments on other debt obligations incurred prior to February 15, 2020; and
- Refinancing of EIDL made between January 31, 2020 and April 3, 2020 and used for payroll costs.
Consistent with earlier guidance, at least 75% of the PPP Loan proceeds must be used for payroll costs (Items 1 and 2 above). If a portion of the PPP Loan proceeds are used to refinance an existing EIDL, those amounts will be counted towards the 75% floor for this purpose but not for purposes of loan forgiveness.
Amounts Eligible for Forgiveness:
Amounts spent on the following during the eight-week period following the date the PPP loan is disbursed (the “covered period”) will be forgiven:
- Payroll costs including salary, wages and tips up to $100,000 of annualized pay per employee (if any) (for eight weeks a maximum of $15,385 per individual) plus covered benefits for employees (but not owners), including health care expenses, retirement contributions and state taxes imposed on employee payroll);
- Owner compensation replacement, calculated based on 2019 net profit with forgiveness limited to 8/52 of 2019 net profit;
- Payments of interest on mortgage obligations incurred before February 15, 2020 to the extent deductible on Schedule C;
- Rent payments on lease agreements in force before February 15, 2020 to the extent deductible on Schedule C; and
- Utility payments under service agreements dated before February 15, 2020 to the extent deductible on Schedule C.
In no event shall the amount forgiven exceed the full principal amount of the PPP Loan plus accrued interest nor shall the non-payroll costs as described in Items 3, 4 and 5 above exceed 25% of the total amount forgiven.
Required Supporting Documentation for Forgiveness
The 2019 Schedule C provided with the PPP Loan Application will be used to determine the permitted amount of net profit allowed to be paid to the owner for the covered period. If the owner has employees, Forms 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records will be required. In addition, evidence of payment must be provided for any business mortgage interest payments, business rent or business utility payments made with PPP Loan proceeds during the covered period.
Additional Guidance Forthcoming
The SBA indicated that it will be providing additional guidance for individuals with self-employment income who (i) were not in operation in 2019 but who were in operation on February 15, 2020 and (ii) will file a Schedule C for 2020.