WASHINGTON, DC – APRIL 02: Small Business Administrator, Jovita Carranza speaks while flanked by … [+]
The Paycheck Protection Program (PPP) Loan program has been the talk of most small businesses circles since the passage of the Coronavirus Aid Relief and Economic Security (CARES) Act late last month.
As a quick recap, business owners can borrow up to $10M or 2.5x average monthly revenue for 2019, whichever is smaller. Loans are forgivable if at least 75% of the funds go towards payroll and the remaining for certain operating expenses.
After a slow start, more and more businesses have been approved and are now receiving their funds, which is great news. Despite that fact, yesterday the SBA gave additional guidance on how the program applies to the Self-Employed and Independent Contractors. So, for those of you in that category who are still applying, here’s what you need to know.
Additional eligibility requirements
In addition to the previous requirements that (i) you were operation on February 15, 2020 (ii) you were an individual with self-employment income and (iii) your principle place of residence is in the United States, you must now have filed or will file a Schedule C for 2019. This schedule is going to be key for many reasons. The first PPP Interim Final Rule said you could use “income or expenses from a sole proprietorship, or other supporting documentation sufficient to demonstration qualifying payroll.”
The SBA has also clarified rules for partnerships. If you are a partner in a partnership, you cannot submit a separate loan application for yourself as a self-employed individual. You must file the application by or on behalf of the partnership.
Updates to calculating and substantiating the maximum borrowing amount
I’ve updated my previous step-by-step article about how to calculate payroll here with the new calculations. But I want to highlight a few factors here as well.
Those of you without employees, regardless of whether you filed a 2019 tax return with the IRS, must provide:
- the 2019 Form 1040 Schedule C to substantiate applied-for PPP Loan amount
- a 2019 IRS Form 1099-Misc detailing non-employee compensation (box 7), invoice, bank statement or book of record that establishes that you are self-employed.
- A 2020 invoice, bank statement or book of record to establish you were in operation on or around February 15, 2020
For those of you with employees, you must supply 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
Again, this is a change from previous guidance. Institutions like Bank of America BAC asked businesses with no employees to provide a Profit and Loss for 2019. I’m curious to hear whether they will ask for this additional verification—if you’ve already applied and they do, let me know.
How PPP loan funds can be used
PPP Loan funds can be used for the following
- Owner compensation replacement based on the 2019 net profit
- Employee payroll costs
- Mortgage interest payment (but not mortgage prepayment or principal payments) on any business mortgage obligation on real or personal property
- Business rent payments
- Business utility payments
- Interest payments on any other debt obligations that were incurred before February 15, 2020.
- Refinancing an EIDL loan made between January 31, 2020 and April 3, 2020. (Note: you must refinance the EIDL if your EDIL loan was used for payroll costs)
One key caveat: to use loan funds for these expenses, you must have claimed or been entitled to claim a deduction for them on your 2019 Schedule C. The SBA stated that these loans are intended to be used to maintain existing operations and payroll, not for business expansion.
Amounts eligible for forgiveness
Your loan plus any accrued interest can be forgiven if you use it for these expenses:
- Payroll costs including salary, wages and tips up to $10,000 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, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019. For example, if you made $100,000 in 2019, the maximum amount of forgiveness for owner compensation replacement is $15,385(($100,000/52) *8)
- Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020 to the extent that they are deductible on Form 1040 Schedule C
- Rent payments on lease agreements in force before February 15, 2020 to the extent they are deductible on Schedule C
- Utility payments under a service agreement before February 15, 2020 to the extent they are deductible on Schedule C
The deductible expenses listed on your Schedule C determines how much of a loan you can obtain and how much can be forgiven. As a result, you’ll need to complete this schedule before you apply, even if you don’t file until the new July 15th deadline. If you’re hoping for PPP financing, you can’t afford to get too relaxed about the later deadline.
Documents on Forgiveness
The Interim Rule also clarifies the documents that will be required to obtain loan forgiveness:
- If you have employees, you submit Forms 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records
- Evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments for the covered period
- Schedule C must be used to determine the amount of net profit allocated to the owner of the for the eight-week covered period.
The last is one of the most interesting to me. Many of my clients were wondering how they were going to prove they paid themselves for loan forgiveness. It appears now that will be determined by your Schedule C. It still may be wise to make sure to deposit your funds from a business account to a personal to show the transfer.
Keep in mind, any amount not forgiven is lent at 1% interest rate, with a two-year maturity period and the first payment is due for six months. So even if you don’t get the entire amount forgiven, you’re still doing pretty well.
The details of the PPP loan program are still evolving, so make sure to come back for any updates. As always, I would love to hear your success and challenges. Contact me at the links below.