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The Small Business Administration released additional guidance that allows self-employed individuals to apply for a Paycheck Protection Program loan.

COVID Financial Management

Paycheck Protection Program Loans Extended to the Self-Employed

  • Jack Rybicki
  • 4/15/2020

Key insights

  • Effective April 10, self-employed individuals are eligible to participate in the Paycheck Protection Program.
  • The Small Business Administration issued additional guidance to assist self-employed individuals with the PPP application process.
  • Guidance continues to be released.

On April 14, 2020, the U.S. Small Business Administration (SBA) issued additional guidance related to the Paycheck Protection Program (PPP). The guidance clarifies a number of issues related to self-employed individuals, who became eligible to file PPP applications April 10.

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The guidance answered a key question regarding the proper treatment by partnerships for active owners who do not receive W-2 wages. The SBA clarified that the active owners’ self-employment income should be included in the average monthly payroll costs the partnership uses to size its PPP loan request, subject to a limitation per active owner of the lesser of actual 2019 earnings or $100,000. A partner in a partnership may not individually submit a separate PPP loan application for lost earnings from the partnership.

Highlights for self-employed individuals

Sizing your loan

Use the net profit reported on line 31 of your 2019 Schedule C, subject to a $100,000 limitation, as the basis for the average monthly payroll costs used to size your PPP loan.

If you have employees, in addition to your net profits as noted above, your average monthly payroll will also include:

  • Employee payroll costs (subject to $100,000 limitation per employee) reflected on Form 941, line 5c – column 1 from each quarter
  • Any pre-tax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare wages and tips
  • Employee benefit programs (Line 14) and pension and profit-sharing plans (line 19), both excluding owner costs
  • State and local taxes assessed on employee compensation

If you did not have employees and reported a net loss in 2019, you cannot apply for a PPP loan.

Documentation you will need to apply

  • Your 2019 tax return, if filed
    • A draft of your 2019 Schedule C, if you have not filed your 2019 tax return
  • Forms 1099 to support gross income and invoices and bank statements or a book of record that establishes you as self-employed
  • If you have employees, provide Forms 941 and state quarterly wage unemployment insurance tax reporting forms, along with evidence of retirement and health insurance contributions
  • Documentation to show you were in operation on or around February 15, 2020

How can you use the loan proceeds

  • Owner compensation replacement, based on eight weeks of 2019 net earnings ($15,385 if you had net earnings of $100,000 or greater in 2019)
  • Employee payroll costs
  • Mortgage interest on real and personal property
  • Rent payments on lease agreements
  • Utility payments

However, the types of allowable uses are limited to those reflected in your 2019 Schedule C. Furthermore, consistent with the rules for businesses, at least 75% of the loan amount must be used for payroll costs (which includes owner compensation replacement).

How does forgiveness work

Assuming you spend the entire loan balance on allowable uses and the required 75% on payroll costs, it appears that the forgiveness amount will be limited to the eight weeks of owner compensation replacement (i.e., 8/52nds of your 2019 Schedule C net profit).

This means, if you qualify for a maximum loan amount of $20,833 (2.5 months of $100,000 net earnings) as a self-employed individual with no employees, only $15,385 will be forgiven. This would leave a loan balance due of $5,448. If you have employee payroll costs, the remaining loan balance due would be even higher!

While this limitation may make sense for a self-employed individual with no employees, it hardly seems appropriate for a self-employed individual who has employee costs. We hope the SBA corrects this guidance in a subsequent update.

Other information you need to know

  • Participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs under the CARES Act.
  • Additional guidance will be provided for self-employed businesses that opened between January 1, 2020, and February 15, 2020.

How we can help

Questions continue to surface related to the PPP. Whether you’re a business, nonprofit, independent contractor, or self-employed individual, the rules around loan sizing and loan forgiveness are complicated and evolving. At CLA, we are staying on top of the latest guidance. Our professionals can help you understand your PPP eligibility, navigate the PPP loan application process, and estimate your loan forgiveness.

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