PPP loans for the self-employed: new directions | Farrell Fritz, PC
The ASB has issued a new interim rule under the CARES Act regarding the application of PPP to self-employed workers. (Provisional regulations published on April 14)
Individuals with self-employment income who file Form 1040, Schedule C
An individual is eligible for a PPP loan if:
- They were in operation on February 15, 2020;
- This is a person with self-employment income (such as an independent contractor or sole proprietor);
- Their main place of residence is in the United States; and
- They have filed or will be filing a Form 1040 Schedule C for 2019.
The SBA has indicated that it will issue additional guidance for individuals with self-employment income who: (i) were not in business in 2019 but were in business on February 15, 2020, and (ii) will file a form 1040 Annex C for 2020.
However, a partner in a partnership cannot submit a separate PPP loan application for themselves as self-employed, even though their distributive share of the income from the partnership may be treated as self-employment income.
Partnerships are eligible for PPP loans under the Act. They can report “active general partners” self-employment income – which is not defined – as a salary cost, up to $ 100,000 annualized, on a PPP loan application filed by or on behalf of the partnership. . Rent, mortgage interest, utilities and other debt services contracted at the partnership level can also be reported on demand.
The maximum loan amount for an individual will depend on whether or not they employ other people in their business.
If a person has no employees, the following methodology should be used to calculate their maximum loan amount:
Step 1: The person should find his IRS Form 1040, Schedule C, Line 31, Net Profit Amount. If this amount is greater than $ 100,000, it should be reduced to $ 100,000. If this amount is zero or less – the business has made no profit or suffered a loss – the individual is not eligible for a PPP loan.
Step 2: Divide the amount from Step 1 by 12 (the average monthly net profit amount).
Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.
Step 4: Add the unpaid amount of any Economic Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that the individual is seeking to refinance, minus the amount of any advance on a loan EIDL COVID-19 (because it does not have to be reimbursed).
Regardless of whether the individual applicant has filed a 2019 income tax return with the IRS, they must complete and provide Form 2019 1040 Annex C with their PPP loan application to justify the PPP loan amount requested, and an IRS form. 2019 1099-MISC detailing the remuneration received from self-employed persons (box 7), the invoice, bank statement or record book that establishes that they are self-employed. The individual applicant must provide a 2020 invoice, bank statement or register to establish that their business was in operation on or around February 15, 2020.
Also note that if a self-employed person broke even or suffered a Schedule C loss in 2019, they are not eligible for a PPP loan.
If the business owner has employees, the following methodology should be used to calculate their maximum PPP loan amount:
Step 1: Calculate the 2019 payroll by adding the following:
- Individual’s Form 1040 Schedule C 2019, Line 31, Net Profit Amount, up to $ 100,000 annualized; if this amount is greater than $ 100,000, it must be reduced to $ 100,000; if the individual suffered a loss last year, this amount should be set to zero;
- 2019 gross wages and tips paid to employees (whose primary place of residence is in the United States), calculated using the 2019 IRS 941 Taxable Medicare Wages and Tips (line 5c-column 1) for each quarter, plus any employee before tax premiums for health insurance or other employee benefits excluded from taxable Medicare salaries and tips; then subtract any amount paid to any individual employee greater than $ 100,000 annualized and any amount paid to any employee whose principal place of residence is outside the United States; and
- Employer health insurance contributions 2019 (health insurance component of form 1040 appendix C line 14), pension contributions (form 1040 appendix C line 19) and national and local taxes assessed on employee compensation (mainly under the state laws commonly referred to as the State Unemployment Tax Act or SUTA from 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 the individual business owner is looking to refinance, minus the amount of any advance on an EIDL COVID-19 loan ( because it does not have to be reimbursed).
Individual must provide their Form 2019 1040, Schedule C, Form 941 (or other equivalent tax forms or payroll processor records with similar information), and quarterly UI tax return forms. of each quarter in 2019 or equivalent payroll processor records, as well as proof of any pension and health insurance contributions, if applicable. A pay stub or similar documentation from the pay period that covered February 15, 2020 must be provided to establish that the individual’s business was in operation on February 15, 2020.
As with all PPP loans, the proceeds should be used for the following purposes:
- Replacement of owner’s compensation, calculated on the basis of 2019 net profit as described above.
- Employee salary costs (as defined in the First Interim Final Rule of PPP) for employees whose primary place of residence is in the United States, if the company has employees.
- Mortgage interest payments (but not mortgage prepayments or principal payments) on any commercial mortgage obligations on real or personal property (for example, interest on a mortgage for the warehouse that the individual purchased to store commercial equipment or interest on a car loan for a vehicle used in the business), commercial rent payments (for example, warehouse where commercial equipment or vehicles are stored) and commercial utility payments. These expenses must have been claimed or can be claimed as deductions for such expenses on Schedule C 2019 of the business owner’s Form 1040 for them to be an authorized use within the eight week period following the first. loan disbursement (the “period). * At least 75% of the PPP loan proceeds must be used for salary costs. *
- Interest payments on any other debt incurred before February 15, 2020 (these amounts are not eligible for a PPP loan forgiveness).
- Refinancing of an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (the maturity will be reset to the two-year PPP maturity). If the person received an SBA EIDL loan from January 31, 2020 to April 3, 2020, they can apply for a PPP loan. If the EIDL loan was not used for salary costs, this does not affect the individual’s eligibility for a PPP loan. If the EIDL loan was used for personnel costs, the PPP loan should be used to refinance the EIDL loan. The proceeds of any advance up to $ 10,000 on the EIDL loan will be deducted from the loan cancellation amount on the PPP loan.
It is important to note that a self-employed person (who files a Form 1040, Annex C) can only use the proceeds of their PPP loan for the uses for which they have spent in 2019. This limitation is necessary in order to ensure that the individual will be able to provide verifiable documentation.
The SBA plans to issue additional guidance for individuals with self-employment income who: (i) were not in business in 2019 but were in business on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020.
As with all PPP loans, the loan forgiveness amount can be up to the full loan principal amount plus accrued interest. However, the actual amount of the loan forgiveness will depend, in part, on the total amount spent during the period covered on:
- Salary costs, including salary, wages and tips, up to $ 100,000 of annualized salary per employee (for eight weeks, a maximum of $ 15,385 per person), as well as covered employee benefits (NB : not owners), including health costs, pension contributions and state taxes imposed on the payroll of employees paid by the employer (such as unemployment insurance premiums);
- Replacement of the owner’s compensation, calculated on the basis of 2019 net profit as described above, with remittance of these amounts limited to eight weeks of 2019 net profit, but excluding any amount equivalent to a qualified sick leave for which credit is claimed under certain family provisions First Coronavirus Response Act;
- Interest payments on mortgage bonds on real or personal property incurred before February 15, 2020, to the extent that they are deductible on Form 1040 Annex C;
- Rent payments on leases in effect before February 15, 2020, to the extent that they are deductible on Form 1040 Annex C; and
- Utility payments under service contracts dated before February 15, 2020 to the extent that they are deductible on Form 1040, Schedule C.
Again, note that the SBA limits the “Homeowner’s Compensation Replacement” remission for individuals with self-employment income, who file a Schedule C, to eight weeks (8/52) of 2019 net income.
Finally, in order for the person to justify their loan cancellation request, if the business has employees, they must submit Form 941 and Quarterly Unemployment Insurance Tax Return Forms, or equivalent records. of the payroll processor, which best correspond to the period covered (with proof of any pension and health insurance contributions). Whether or not the business has employees, the individual must submit proof of commercial rent, commercial mortgage interest payments on real or personal property, or utility payments during the period covered if they have used the loan proceeds for these purposes.
Annex C of Form 1040 2019 that was provided at the time of the PPP loan application should be used to determine the amount of net profit allocated to the owner for the eight week covered period.