Additional SBA Guidance on the Paycheck Protection Program

Yesterday afternoon (April 14, 2020), the Small Business Administration provided guidance on two key areas of uncertainty in the Paycheck Protection Program (PPP). The guidance focuses on the self-employed, including partners/partnerships and applies to applications submitted under the PPP through June 30, 2020, or until funds made available for PPP are exhausted. Below is an overview of the Interim Final Rule; this is an overview and is not all-inclusive. Significant additional details are contained in the Interim Final Rule here and should be reviewed and discussed with your professional advisors.

Self-employed and partners/partnerships

Who Can File?

• If you were in operation on February 15, 2020, are an individual with self-employment income (independent contractor or a sole proprietor, for example), your principal place of residence is in the U.S. and you filed or will file a Form 1040 Schedule C for 2019, you are eligible for PPP. (1)
• Partners / partnerships: If you are a partner in a partnership, you may not submit a separate PPP 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.
• A partnership and its partners, including an LLC filing taxes as a partnership, are eligible for one PPP loan.

Participation in the PPP may affect your eligibility for state administered unemployment compensation or unemployment assistance programs, including the programs authorized by the CARES Act, or CARES Act Employee Retention Credits.

Loan Calculations and Documentation Required

The Interim Final Rule discusses loan amounts and loan forgiveness calculation for individuals with self-employment income – with and without employees. The maximum loan amount is based on 2.5 months of the borrower’s payroll during the one-year period preceding the loan. Important details on calculations are included in the Interim Final Rule here. Documentation required includes:

If you’re self-employed with no employees, you must include your completed 2019 Form 1040 Schedule C with the PPP application. If you have not filed your 2019 return, you must still fill out Schedule C, compute the net profit amount (line 31) and include it with your PPP application to substantiate the applied-for loan amount. You must also include a 2019 IRS Form 1099-MISC detailing non-employee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed and  a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

If you’re self-employed with employees, you must include in your PPP application 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.

Use of Loan Proceeds

For the self-employed the Interim Final Rule lays out details of allowable use of loan proceeds, which include in brief:

• Owner compensation replacement
• Employee payroll costs (at least 75% of loan proceeds must be used for payroll costs)
• Mortgage interest payments on any business mortgage obligation on real or personal property
• Interest payments on any other debt obligations that were incurred before February 15, 2020
• Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020

Amounts Eligible for Forgiveness

Amount of forgiveness can be up to the full principal amount of the loan. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on:

• Owner compensation replacement (for individuals with self-employment income who file a Schedule C, limited to 8 weeks’ worth (8/52) of 2019 net profit)
• Employee payroll costs (at least 75% of loan proceeds must be used for payroll costs)
• Mortgage interest payments on any business mortgage obligation on real or personal property
• Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C
• Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C

Additional guidance and clarification are provided in the full Interim Final Rule. We encourage you to read it in full and discuss with your tax advisor prior to taking action and to ensure you are gathering and maintaining appropriate documentation for all requirements of the loan(s) and loan(s) forgiveness

As always, if you have questions, please contact your Smith and Howard tax advisor or use the contact form at the bottom of this page.

(1)SBA will issue additional guidance for those 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 Form 1040 Schedule C for 2020