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SBA Issues Guidance on Paycheck Protection Program Loans for Self-Employed Individuals and Independent Contractors

Posted 11:28 PM by

On April 14, 2020, the U.S. Small Business Administration (SBA) issued guidance regarding the Paycheck Protection Program (PPP) application process for self-employed individuals. The application process was officially open to sole proprietors and independent contractors on April 10, 2020, but it was difficult to complete the application due to the lack of sufficient guidance. While the new guidance may not answer all outstanding questions, the following provides a brief summary of the clarifications and information necessary for application submission.  

Partners/Partnerships

A member of a partnership that receives self-employment income may not submit a separate PPP application, but the self-employment income can be reported as a payroll cost on a PPP application filed by the partnership (up to $100,000 annualized). The SBA released this guidance after many had already filed their loan application, but currently there is no guidance on how to proceed if a partnership already filed a PPP application and did not include partners.

Eligibility

In general, individuals with self-employment income, such as an independent contractor or sole proprietor, are eligible if they:

  • Have a principal residence in the U.S.
  • Were in operation as of Feb. 15, 2020
  • Filed or will file a Form 1040 Schedule C for 2019

Additional guidance will be issued for individuals who were not in operation in 2019 but were in operation as of Feb. 15, 2020, and will file a 2020 Schedule C. Additionally, participation in the PPP may affect eligibility for unemployment compensation.

Maximum Loan Amount – Without Employees

Loan Calculation

In order to determine the maximum loan amount for an applicant without employees, use this calculation:

  1. Start with the net profit from the 2019 Form 1040 Schedule C (maximum amount of $100,000). If the amount is zero or less, no loan is permitted.
  2. Divide the amount by 12.
  3. Multiply the amount by 2.5.
  4. If applicable, add Economic Injury Disaster Loan (EIDL) amounts made between Jan. 31, 2020, and April 3, 2020, but subtract the amount of any EIDL advance.

Assuming the maximum allowable net profit and that no EIDL exists, the maximum loan amount would be $20,833.

Documentation

Applicants must provide the following documentation along with their loan application:

  • A completed 2019 Form 1040 Schedule C (even if it has not been filed yet)
  • A 2019 Form 1099-MISC, invoice, bank statement, or book of record to establish you are self-employed
  • Records from 2020 to establish you were in operation on or around Feb. 15, 2020

Maximum Loan Amount – With Employees

Loan Calculation

The maximum loan amount for applicants with employees is generally calculated in the same way as those without employees, but there are a few additions. Use the following calculation to determine the maximum loan amount for those with employees:

  1. Start with the net profit from the 2019 Form 1040 Schedule C (maximum amount of $100,000).
  2. Add 2019 wages of employees whose principal residence is in the U.S. (maximum of $100,000 annualized per employee).
  3. Add 2019 employer health insurance contributions, retirement contributions, and state and local taxes assessed on compensation (under the State Unemployment Tax Act, or SUTA, from state quarterly wage reporting forms).
  4. Divide the sum of the preceding (steps 1-3) by 12.
  5. Multiply the amount by 2.5.
  6. If applicable, add EIDL amounts made between Jan. 31, 2020, and April 3, 2020, but subtract the amount of any EIDL advance.

Documentation

Applicants must provide the following documentation along with their loan application:

  • A completed 2019 Form 1040 Schedule C
  • Form 941 (or other tax forms or equivalent payroll processor records containing similar information)
  • State quarterly wage unemployment insurance tax reporting forms (or equivalent payroll processing records)
  • Evidence of any retirement and health insurance contributions
  • Evidence to establish you were in business as of Feb. 15, 2020

Permissible Uses of Proceeds

The loan proceeds may be used for the following (however, at least 75% of permissible uses must comprise owner compensation and employee payroll costs):

  • Owner compensation replacement, calculated based on 2019 Form 1040 Schedule C net profit (maximum of $15,385)
  • Employee payroll costs
  • Mortgage interest payments (includes personal property such as a business vehicle)
  • Utility payments (includes cost of gas for a business vehicle)
  • Interest payments on any other debt obligations that were incurred before Feb. 15, 2020 (not eligible for PPP loan forgiveness)

In addition to the general requirements regarding permissible uses, individuals must have claimed or been entitled to claim a deduction on their 2019 Form 1040 Schedule C for the expenditure to qualify as a permissible use.

Amount Eligible for Forgiveness

The costs that are eligible for loan forgiveness include the following:

  • Salary for an employee, plus covered benefits ($100,000 annualized maximum salary, which equates to approximately $15,385 over the eight-week covered period)
  • Owner compensation replacement for individuals with self-employment income (limited to 8/52 of 2019 net profit)
  • Qualifying mortgage interest
  • Qualifying rent expense
  • Qualifying utility payments

Additionally, 75% of the amount forgiven must be attributable to payroll costs (including owner compensation replacement).

For additional questions, please reach out to your KSM advisor or complete this form.

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About Katz, Sapper & Miller
KSM is a nationally recognized consulting, tax, and audit firm. Through our deep experience across multiple disciplines and industries, we leverage emerging technologies, combined with our people’s differing perspectives, ingenuity, and creativity, to help our clients solve their most difficult challenges.

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