Interim Final Rule for CARES PPP for the Self Employed
The newest Interim Final Rule for the CARES Act's "Paycheck Protection Program" (PPP) was released April 14, 2020. This guidance supplements the first PPP interim final rule (effective April 2, 2020) with additional clarity for individuals with self-employment income who file a Form 1040, Schedule C.
Taxpayers who were in operation on February 15, 2020, have self-employment income (such as an independent contractor or a sole proprietor), have a principal place of business in the USA and have filed or will file a 2019 Form 1040 Schedule C are eligible.
However, partners in a partnership are NOT eligible to submit their own PPP loan application - instead the self-employment income of general active partners may be reported as a payroll cost on a PPP application filed by or on behalf of the partnership.
The maximum loan amount for individuals with self-employment income depends if the individual has employees or not. If there are no employees, there is a 4-step calculation process:
1) The net profit amount from 2019 Form 1040 Schedule C, not to exceed $100,000. If the 2019 tax return is not filed, the taxpayer should fill it out and compute the value.
2) Calculate the average monthly net profit amount by dividing Step 1 by 12.
3) Multiply the average net profit amount from Step 2 by 2.5.
4) Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan.
In addition to the 2019 Form 1040 Schedule C (filed or unfiled), the taxpayer must provide a 2020 invoice, bank statement or book of record to establish he/she was in operation on or around February 15, 2020. If the 2019 Schedule C shows a loss, you are not eligible for a PPP loan except and to the extent it is used for employee payroll expenses.
If there are employees, the same methodology should be used, with the changes noted below for Step 1:
1) Add the following amounts:
a. The net profit amount from 2019 Form 1040 Schedule C, not to exceed $100,000. If the 2019 tax return is not filed, the taxpayer should fill it out and compute the value.
b. 2019 gross wages paid to employees, not to exceed $100,000 paid to any one employee (annualized)
c. 2019 employer health insurance contributions, retirement contributions and state/local taxes accessed on employee compensation
The loan proceeds for self-employed taxpayers can be used for the following (with at least 75% of the proceeds being used for payroll costs):
1. Owner compensation replacement (calculated based on net profit as described above, limited to 8/52 of 2019 Schedule C income up to a maximum of $15,385)
2. Employee payroll costs, including employee benefits (but not owner benefits)
3. Interest on business mortgages and personal property loans for business vehicles and equipment
4. Business utilities
5. Refinancing of an SBA EIDL loan made between January 31, 2020 and April 3, 2020
For loan forgiveness, the loan proceeds should be spent in the covered period, which is eight weeks from the date of receiving the loan proceeds. The 2019 Form 1040 Schedule C will be relied upon for the eight-week covered period allocation of net profit allocated to the owner. Note that allocated expenses for the business use of a home are not eligible expenses for forgiveness.
This newest Interim Final Rule is 19 pages in length. The purpose of this narrative is to quickly communicate and highlight the clarifications that are most relevant to the questions we have been hearing from clients in the recent weeks. Borrowers must certify that the loan is necessary to support the ongoing operations of the business, Participation in the PPP loan program may impact your eligibility for state administered unemployment compensation programs or employee retention tax credits.
Please contact us if you have any questions about this new Interim Final Rule, the PPP relief and other COVID-19 relief options currently available.