Interim Final Rule - Additional Eligibility Criteria and Requirements for Certain Pledges of Loans
On April 2, 2020 the Small Business Administration (SBA) posted an interim final rule announcing the implementation of sections 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This rule provides additional guidance on eligibility issues and certain requirements for pledges of Paycheck Protection Program (PPP) Loans for individuals with self-employment income who file a 1040, Schedule C.
Eligibility Requirements for Individuals with Self-Employment Income who File Schedule C:
You are eligible for a PPP loan if:
You were in operation on February 15, 2020.
You're an individual with self-employment income (such as an independent contractor or a sole proprietor).
The individual's principal place of residence is in the United States.
The individual has filed or will be filing a Form 1040 Schedule C for 2019.
However, if you are a partner in a partnership that has filed for a PPP Loan, then the individual will not qualify for a separate PPP Loan. Instead, the Partnership should have reported self-employment income of general active partners as payroll cost (up to $100,000 annualized per partner) on the partnerships PPP loan application. Generally, most of the costs that the PPP loans were intended to cover, such as rent, mortgage interest, utilities, and other debt services, are incurred at the partnership level and not the individual partner level.
Additionally, the SBA will be issuing further guidance on individuals who were not in operation in 2019, but were in operation on or before February 15, 2020, and will be filing a Form 1040 Schedule C for 2020.
Calculating Maximum Borrowing Amount:
PPP loan amounts are generally determined by multiplying the average monthly payroll costs of your business by 2.5. The SBA's issuance of its Interim Final Rule, discussed above, has provided guidance for how self-employed individuals and independent contractors should calculate their PPP loan amount. Please note the following general calculations; however, please reach out to Kenneth Freed & Co. for assistance or refer to actual interim final rule at the link provided within.
Self-employed individuals and independent contractors with NO EMPLOYEES:
Compute your maximum loan amount by finding your 2019 net profit (Schedule C, Line 31 - maximum net profit allowed is $100,000)
Divide 2019 Schedule C, Line 31, Net Profit by 12 to calculate your average monthly net profit.
Multiply your average monthly net profit by 2.5.
Self-employed individuals and independent contractors WITH EMPLOYEES:
To calculate your annual payroll costs, please sum the following:
2019 Schedule C, Line 31 Net Profit (maximum net profit $100,000)
2019 Gross wages paid to employees, per filed Forms 941, Line 5c, Column 1 (maximum wages of $100,000 per employee)
2019 Employer health insurance contributions, Schedule C, Line 14
2019 Employee retirement contributions, Schedule C, Line 19
2019 State and local taxes assessed on employee compensation (SUTA/EMAC)
Divide sum of above payroll costs by 12 to arrive at average monthly net payroll costs
Multiply your average monthly net payroll costs by 2.5
Specific Documentation Required to Support your Application:
The following is a list that your lender may require you to submit with your application and that you should have ready to provide:
Self-employed individuals and independent contractors will be required to provide their 2019 Form 1040, Schedule C with their PPP loan application.
Copies of tax returns
Forms 941 and Form 940 if you have employees
Copies of any Forms 1099-MISC received
Evidence and support for health insurance and retirement benefits paid in 2019
Evidence and support to prove you were in business as of February 15, 2020 such as rent, mortgage and/or utility service payments
Copies of driver's license
How can PPP loans be used by Individuals with Self-Employment Income?
The SBA provides guidance on what costs PPP loans can be used to cover. These specific costs detailed below must have been incurred by the individual in order to claim these costs in the PPP loan application. Please see the list of expenses below:
Owner compensation replacement
Employee payroll costs (if you have employees)
Mortgage interest payments (not principal payments)
Business rent payments
Business utility payments
Interest payments on other debt obligations that were incurred before February 15, 2020.
Individuals who receive the PPP loans must use at least 75 percent of the proceeds for payroll costs. Not more than 25% of the PPP loan can be used to pay non-payroll costs for the loan to be completely forgiven.
What Costs are Eligible for Forgiveness?
Final Interim Rule guidance states that the full principal amount of PPP loan, plus accrued interest, can be forgiven. Amount to be forgiven will be determined over an eight (8) week period upon loan being granted and will depend upon amounts spent over the covered period. Below are examples of how the costs listed above can be deemed eligible for forgiveness:
Owner compensation replacement
Calculated based on 2019 net profit, up to $100,000 annualized, limited to eight weeks' worth. Owner benefits are excluded.
Example: $100,000 x (8 week period / 52 weeks) = $15,385 for owner draws
Employee payroll costs
Includes salary, wages, and tips up to $100,000 of annualized pay per employee, as well as covered benefits for the employees. These benefits include health care expenses, retirement contributions, and state taxes imposed on employee payroll paid.
The calculation will be similar to the one for owner compensation replacement.
Mortgage interest payments are forgiven to the extent they are deductible on Form 1040 Schedule C
Rent payments are forgiven to the extent they are deductible on Form 1040 Schedule C
Utility payments are forgiven to the extent they are deductible on Form 1040 Schedule C
Kenneth Freed & Company would like to caution those receiving PPP loan proceeds to be prepared to potentially have to repay a portion of PPP loans not forgiven. Unforgiven portions of PPP loans become a two (2) year loan, with interest at 1% and repayments deferred for first 6 months.
Please contact us at Kenneth Freed & Company to discuss PPP loan and its requirements in detail prior to acting or refer to the actual Interim Final Rule guidance at the following link:
