More Developments on the Paycheck Protection Program

With information on the COVID-19 pandemic changing every day, we’re also seeing rapid developments regarding the Paycheck Protection Program (PPP). At this writing, the money has been depleted for this program and Congress is discussing how to fund it further. (Editor’s note: As of April 24, 2020, legislation has been signed to add $310 billion to the PPP.)

In the meantime, we’ve summarized the latest updates and guidelines from the Small Business Association (SBA) regarding this vital program.

PPP Loan Eligibility for Self-Employed Individuals

If you’re self-employed and file a Form 1040 Schedule C, you’re eligible for a PPP loan as long as you meet the following conditions:

  • You were in operation on Feb. 15, 2020
  • You are an individual with self-employment income, such as an independent contractor or sole proprietor
  • Your principal place of residence is in the United States
  • You filed (or will file) a Form 1040 Schedule C for the 2019 tax year

Partners in a partnership cannot submit a separate PPP loan application for themselves as self-employed individuals. However, partnerships themselves are eligible for PPP loans under the CARES Act. So an individual partner’s self-employment income can be reported as a payroll cost (up to $100,000 annualized) on the partnership’s PPP loan application.

Calculating Your Maximum Loan Amount and Required Documentation

If you are an independent contractor or sole proprietorship, take the following steps to calculate your maximum loan amount:

  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.
  2. Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).
  3. Multiply the average monthly net profit amount from Step 2 by 2.5.
  4. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between Jan. 31—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 provide the following documentation with your application:

  • The 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount (regardless of whether you have filed a 2019 tax return with the IRS, you must provide)
  • 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
  • A 2020 invoice, bank statement or book of record to establish you were in operation on or around Feb. 15, 2020

Eligible Uses of PPP Loans for Self-Employed Individuals

Self-employed individuals who a file a 2019 Form 1040 Schedule C can use the PPP loan for the following:

  • Owner compensation replacement
  • Employee payroll costs for employees whose principal place of residence is in the United States (if you have employees)
  • Mortgage interest payment (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property, business rent payments and business utility payments. However, you must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan.
  • Interest payment on any other debt obligations that were incurred before Feb. 15, 2020
  • Refinancing an SBA EIDL loan made between Jan. 31—April 3, 2020. If you received one of these loans between these dates, you can apply for a PPP loan. If you didn’t use your EIDL loan for payroll costs, it does not affect your eligibility for a PPP loan. If you did, however, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Although the CARES Act makes businesses in operation on Feb. 15, 2020 eligible for PPP loans, self-employed individuals will need to rely on their 2019 Form 1040 Schedule C, which provides verifiable documentation on expenses between Jan. 1—Dec. 31, 2019.

For individuals with income from self-employment from 2019 for which they have filed or will file a 2019 Form 1040 Schedule C, expenses incurred between Jan. 1—Feb. 14, 2020 may not be considered because of the lack of verifiable documentation on expenses in this period.

Additionally, at least 75% of the PPP loan proceeds must be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for 11 forgiveness purposes), the amount of any refinanced EIDL will be included.

Loan Forgiveness for PPP Loans

The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount forgiven will depend on the total amount spent over the covered period on the following:

  • 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 above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit, but excluding 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 payments)
  • Rent payments on lease agreements in force before Feb. 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments)
  • Utility payments under service agreements dated before Feb. 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments)

The following documentation is required for PPP loan forgiveness:

  • Borrower certification required by Section 1106(e)(3) of the Act
  • Submit Form 941 (if you have employees) and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (including evidence of retirement and health insurance contributions)
  • For self-employed and businesses with employees, 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 the loan for these purposes
  • 2019 Form 1040 Schedule C 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 covered period

Clarification Regarding Eligible Businesses

Eligible businesses owned by directors or shareholders of a PPP lender are permitted to apply for a PPP loan for their businesses through the lender with which they are associated. This holds true as long as they have less than 30% equity interest in the PPP Lender. Favoritism by the lender in processing time or prioritization is prohibited.

This does not apply to a director or owner who is also an officer or key employee of the PPP lender. These persons may obtain a PPP loan from a different lender, but not from the PPP lender with which they are associated.

Eligibility for Legal Gaming Companies

Businesses that receive legal gaming revenues are eligible for PPP loans. The business’s legal gaming revenue (net of payouts but not other expenses) must not have exceeded $1 million in 2019 and must have comprised less than 50% of that year’s total revenue.

You can read the SBA’s entire update here for further explanation as to the reasons for these requirements. In the meantime, contact James Moore’s small business CPAs if you have questions or concerns about the Paycheck Protection Program. We’ll keep you updated as more information becomes available.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.