The SBA released much needed guidance and regulations on applying for the Paycheck Protection Program (“PPP”) for individuals who file tax returns as independent contractors or sole proprietors. This guidance, which was released on April 14th, was quickly overshadowed by the news two (2) days later that the PPP had run out of funds. The SBA released a statement on the morning of April 16th claiming that the Program is no longer accepting new applications for individuals or business and that it will not accept new lenders at this time.
What will happen to small businesses from here remains a mystery. Reportedly, if passed by Congress, another $250 billion will be used to replenish the fund. There is no set date as to when this money would become available, because the Democrats are tying this to allowing for moneys to go to State and local governments. Treasury Secretary Steven Mnuchin has pointed out that approximately one-half (1/2) of the United States economy consists of small businesses. These small businesses need help to stay afloat until this period is over and the economy may resume. Many of them do qualify for the $600 per week federal unemployment benefit and state unemployment benefits, which eases the pain, but puts them on a very low allowance when business overhead continues to be incurred. .
When implementing the PPP, it seems clear that the decision was made to prioritize small business that were not sole proprietorships or independent contractors. This decision was likely made in order to help businesses with more potentially affected employees first. It may also be that the SBA feared that the fund would be depleted faster if independent contractors and sole proprietors were treated the same way as other small businesses. Either way, the new regulations for independent contractors came with sad surprises for the “disfavored” small businesses, and give ammunition for minority groups to conclude that they are being discriminated against, since high percentage of minorities are sole contractors and sole proprietors. It is sad to see small and independent minority owned businesses snuffed out of existence by a bureaucracy that may or mot not be unfriendly as opposed to simply being unable to help them in time.
Small business owners who own or operate their business with a spouse should consider whether they can file their 2019 and 2020 income tax returns as a partnership for income tax purposes, so that they can borrow and have forgiveness that can include 2 ½ month’s health insurance and pension costs, and the other advantages described below. This will be a common and well justified planning technique to be taken before applying for the PPP loan for many American families. The IRS instructions to the Form 1065 Partnership tax return indicate that two or more people engaged in a trade or business should file taxes as a Partnership, so this may be the best strategy for small businesses owned by married couple.
The first surprise was that there is no allowance made for the health insurance or pension or 401(k) contributions for the business owner, unlike what applies for small companies and entities taxed as partnerships.
The regulations also point out that there is no credit allowed for an individual’s own “home, truck, or shed,” despite the fact that the U.S. tax code recognizes that having these are necessary to a business and that they are deductible as legitimate business expenses. The regulations state that self-employed taxpayers “have few of the overhead expenses that qualify for forgiveness under the Act.” This places independent contractors and sole proprietors in a tough position, since many have significant additional expenses to pay for the part of their homes, trucks, or “sheds” in lieu of rent. Maintaining these amenities is not inexpensive, especially for individuals whose sole source of income may be unemployment checks.
Self-employed individuals may also have high liability and casualty insurance costs, and high tuition payments for their children. They will be thrilled to hear that they have few overhead expenses and should probably just throw away their bills for rent, tuition, mortgage payments, etc.
Another area in which independent contractors and sole proprietors lose out to other small business is timing. Most small businesses have the option of choosing between using the 2019 calendar year or the year ending with the calendar month prior to taking the PPP loan to measure income, payroll, etc. Independent contractors, however, may only base their PPP loan amount on the 2019 calendar year.
Further, most seasonal businesses are able to use a modified measure of a calendar year in order to better represent their income streams. Independent contractors and sole proprietors are not entitled to these benefits, despite the fact that many of them work seasonally.
Businesses organized as S Corporations and partnerships are not required to complete any portion of their 2019 tax return prior to applying for PPP loans. Independent contractors and sole proprietors, however, are required to complete Schedule C, which is often the most complex part of their federal income tax return.
This requirement comes at a difficult time for the accounting profession as well. Between working from home, losing staff, limited hours, social distancing, and a sudden influx of clients, the accountants who are still working are stretched very thin and can be expected to favor their bigger clients who pay bigger bills and can afford to pay them. This can make it nearly impossible for independent contractors and sole proprietors to get quick and concise information or instruction on completing a Schedule C.
According to many it is going to take more than $250 billion in extra funds to help the remaining small businesses and also the independent contractors and sole proprietors to get through this pandemic. With the current regulations, it seems as though the federal government has left independent contractors and sole proprietors behind in order to focus on “bigger” small businesses.
Another problem is that the vast majority of banks who are registered to do PPP SBA loans only make them available for their preexisting customers, and a great many minorities bank with smaller banks that do not have SBA accreditation. There has not been any visible effort by the SBA to encourage or require banks to be open for business for all possible borrowers. Nondiscrimination provisions are sorely lacking from the SBA regulations.
While these regulations and the situation are very disappointing, it is important to still do the best we can to care for our clients, friends, and family, and to hope that the government will come around to do the right thing.
Hopefully the SBA will come around in the not too distant future to help out this backbone of the American work and business force. Until then there are thousands of meals being missed in middle and lower middle class neighborhoods who do not seem to getting their share of the $2,200,000 stimulus package.
For a white paper on this subject you can e-mail me at firstname.lastname@example.org and put “proprietors matter” in the subject line.