We've previously written about the Paycheck Protection Program (the "PPP"), a program through which the Small Business Administration ("SBA") guaranteed over one million loans through 4,600 lenders throughout the United States. The average PPP loan amount thus far has been $239,000.
On April 14, 2020, the SBA issued additional interim rules specifically addressing applicants who file a Form 1040, Schedule C tax form. Individuals with income from self-employment who file a Form 1040, Schedule C are eligible for a PPP loan if:
they were in operation before February 15, 2020, and
they have self-employment income, and
their principal place of business is in the United States, and
they filed or will file a Form 1040 Schedule C for 2019.
How do I establish that my business was in operation on or before February 15, 2020?
To establish that your business was in operation on or around February 15, 2020, you must provide the Schedule C, along with a 2020 invoice, bank statement, or other evidence that establishes you were in operation at that time.
Are there any expenses I cannot consider for the purposes of the Schedule C tax form?
Yes. Individuals with income from self-employment from 2019 for which they can file 2019 Form 1040 Schedule C cannot consider expenses incurred between January 1, 2020 and February 14, 2020.
What other forms do I need to file?
You will need to submit Form 941 if you have employees, and state quarterly wage unemployment insurance tax reporting forms, with evidence of retirement and health insurance contributions.
What if I wasn't in operation in 2019, but I was on February 15, 2020?
The SBA is planning to issue further guidance for individuals who were not in operation in 2019, but who were in operation on February 15, 2020, and who will file a Form 1040 Schedule C for 2020.
I'm a partner in a partnership. Can I apply for a PPP loan?
No. A partner in a partnership cannot apply for a PPP loan; rather, the partnership itself must apply for the loan by reporting the self-employment income of the active general partners as a payroll cost.
How much can a self-employed individual borrow?
The answer to this question depends on whether or not you employ other individuals.
If you have no employees other than yourself, use the following to calculate how much your maximum PPP loan amount could be:
Look at the Net Profit amount reported on Line 31 of your Form 1040 Schedule C filed in 2019. If you haven't filed a 2019 return yet, fill out a Schedule C now. You do not have to file it yet, but you will need to submit it to the lender. If the amount is over $100,000, use $100,000 in this step (not more). If the amount is $100,000 or less, use the exact amount reflected in Line 31. If the amount is $0 or less, you are not eligible for a PPP loan.
Divide the Net Profit by 12.
Multiple that amount by 2.5.
Add the amount of any EIDL loan (discussed in an earlier blog post) made to you between January 31, 2020-April 3, 2020 (if you have received an EIDL loan) that you seek to refinance, less the amount of any EIDL advance you have already received.
If you have employees, use the following to calculate how much your maximum PPP loan amount could be:
Look at the Net Profit amount reported on Line 31 of Form 1040 Schedule C. If you haven't filed a 2019 return yet, fill out a Schedule C now. You do not have to file it yet, but you will need to submit it to the lender. If the amount is over $100,000, use $100,000 in this step (not more). If the amount is $100,000 or less, use the exact amount reflected in Line 31. If the amount is $0 or less, use $0.
Add 2019 gross wages and tips paid to your employees whose principle place of residence is in the United States, computed using 2019 IRS Tax Form 941 from each calendar quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages and tips.
Subtract any amounts paid to any individual employees in excess of $100,000 on an annual basis.
Add 2019 employer health insurance contributions, retirement contributions, and state and local taxes assessed on employee compensation.
Divide this total sum by 12.
Multiple your result by 2.5.
Add the amount of any EIDL loan (discussed in an earlier blog post) made to you between January 31, 2020-April 3, 2020 (if you have received an EIDL loan) that you seek to refinance, less the amount of any EIDL advance you have already received.
How can I use any loan proceeds I receive?
Self-employed individuals can use PPP loan proceeds to cover:
Owner compensation replacement;
Employee payroll costs;
Mortgage interest payments on business mortgage obligations on real or personal property;
Business rent;
Utility payments; and
Interest payments on any other debt obligations incurred before February 15, 2020 (these amounts are not eligible for PPP loan forgiveness).
At least 75% of the PPP loan proceeds must be used for payroll costs. These expenses must have been claimed (or must be claimed, if you have not filed 2019 taxes yet) on the 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first loan disbursement. If you already received an EIDL loan between January 31, 2020 and April 3, 2020 and used that loan for payroll costs, your PPP loan must be used to refinance the EIDL loan, and such amounts will not be forgiveable.
What part of the loan is forgiveable?
Payroll Costs: Salary, wages, and tips (for 8 weeks, and a maximum of $15,385 per individual) as well as covered benefits for employees. Benefits for owners are likely not included in the payroll cost calculation.
Owner Compensation Replacement: Forgiven amounts are limited to eight weeks' worth of 2019 net profit, but exclude any qualified sick leave equivalent for which a credit is claimed under Section 7002 of the Families First Coronavirus Response Act ("FFCRA") or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA.
Payments of Interest on Mortgage Obligations: Apply to real or personal property incurred before February 15, 2020.
Rent Payments: On leases in place before February 15, 2020.
Utility Payments: Under service agreements dated before February 15, 2020.
Have questions? We have answers.
Call us at (515) 281-1475 or email us at akanne@2501grand.com.
This Wandro & Associates Update is intended to inform firm clients and friends about legal developments, including recent decisions of various courts and administrative bodies. Nothing in this Practice Update should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this Update without seeking the advice of legal counsel.