Paycheck Protection Loans For the Self-Employed

Note: This Information has been condensed from SBA preliminary guidance issued on 4/13/2020 for which the SBA was soliciting comments. But it does answer a number of questions with respect to self-employed individuals applying for a Paycheck Protection Program (PPP) loan. The information is in the form of Q & As. I have income from self-employment and file a Form 1040, Schedule C. Am I eligible for a PPP Loan? You are eligible for a PPP loan if: You were in operation on February 15, 2020; You are an individual with self-employment income (such as an independent contractor or a sole proprietor); Your principal place of residence is in the United States; and You filed or will file a Form 1040 Schedule C for 2019. Partnerships - However, if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. How do I calculate the maximum amount I can borrow and what documentation is required? How you calculate your maximum loan amount depends upon whether or not you employ other individuals. No Employees - If you have no employees, the following methodology should be used to calculate your maximum loan amount: Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan. Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12). Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5. Step 4: 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 advance under an EIDL COVID-19 loan (because it does not have to be repaid). Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020. If you have employees, the following methodology should be used to calculate your maximum loan amount: Step 1: Compute 2019 payroll by adding the following: a. Your 2019 Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized. If this amount is over $100,000, reduce it to $100,000. If this amount is less than zero, set this amount at zero; b. 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States; and c. 2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms). Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12). Step 3: Multiply the average monthly amount from Step 2 by 2.5. Step 4: 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 advance under an EIDL COVID-19 loan (because it does not have to be repaid). You must supply your 2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020. How can PPP loans be used by individuals with income from self-employment who file a 2019 Form 1040, Schedule C? The proceeds of a PPP loan are to be used for the following Owner compensation replacement calculated based on 2019 net profit. Employee payroll costs for employees whose principal place of residence is in the United States, if you have employees. Other Business Expenses: Similar expenses would have had to have been deducted on the 2019 Schedule C to be a permissible use during the eight-week period (covered period) following the first disbursement of the loan. o Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property. o Interest payments on any other debt obligations that were incurred before February 15, 2020 (Note: such amounts are not eligible for PPP loan forgiveness). o Business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business), and o Business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle). Are there any other restrictions on how I can use PPP loan proceeds? Yes. At least 75 percent of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included. What amounts shall be eligible for forgiveness? The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on: Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as 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); Owner compensation replacement, calculated based on 2019 net profit as previously described above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit. Note: Excluded from payroll and owner compensation is any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA: Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage interest payments); Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments). What documentation will I be required to submit to my lender with my request for loan forgiveness? In addition to the borrower certification required by the Act, to substantiate your request for loan forgiveness, if you have employees, you should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions). Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes. The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period. The Administrator, in consultation with the Secretary, determined that for purposes of loan forgiveness it is appropriate to require self- employed individuals to rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner during the covered period. Are    businesses    that    receive    revenue    from    legal    gaming eligible for a PPP Loan? A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues if: a) the business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019; and b) legal gaming revenue (net of payouts but not other expenses) comprised less than 50 percent of the business’s total revenue in 2019. Businesses that received illegal gaming revenue are categorically ineligible. The Administrator, in consultation with the Secretary, believes this test appropriately balances the longstanding policy reasons for limiting lending to businesses primarily and substantially engaged in gaming activity with the policy aim of making the PPP Loan available to a broad segment of U.S. businesses and their employees. Please call us at (248) 816-1220 or 800-276-8319 to set up a free consultation. Or Book Your Consultation here: We service clients worldwide.