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SBA Releases Guidance on Self-Employed Individuals and the Paycheck Protection Program

On April 14th, the US Treasury released interim final rules regarding the eligibility and requirements for self-employed individuals to participate in the Paycheck Protection Program (PPP). Here are certain key highlights and considerations:

To be eligible for the PPP you must satisfy four requirements:

  1. You were in operation on February 15, 2020,
  2. You must be an self-employed individual (such as an independent contractor or sole proprietor),
  3. You have a principal place of residence in the United States, and
  4. You have filed or will file a 2019 Form 1040 Schedule C.**

Partnerships
If you are a Partner in a Partnership receiving self-employment income you may not submit your own PPP application for the income derived from your Partnership self-employed earnings. Instead, the self-employed earnings of general active partners may be reported as payroll costs, up to $100,000 annualized, on a PPP loan application filed by the Partnership.

Sole Proprietors
For sole proprietors, the Treasury guidance specifically states that your PPP loan application must have a 2019 Form 1040 Schedule C attached to it to substantiate the amount you are applying to receive, along with any 1099-MISC, invoices, bank statements, or book of records that prove you are self-employed. Additionally, you must provide a 2020 invoice, bank statement, or other evidence that proves you were in operation on or around February 15, 2020.

Your maximum loan amount will be calculated under one of two scenarios using the formula previously provided by the US Treasury of determining your monthly average payroll costs and multiplying that result by 2.5.

Scenario 1: You have no employees. Therefore your loan will be calculated using your 2019 Form 1040, Schedule C, Line 31 net profit amount. If this amount is over $100,000 you must reduce it to $100,000 for the limit. If you do not have a 2019 Schedule C you must fill one out and compute your Line 31 net profit.

Documentation required: 2019 Schedule C to substantiate the PPP loan amount, 2019 Form 1099-MISC to support nonemployee compensation, if applicable, invoice, bank statement, or book of record that establishes you are self-employed.

If your 2019 Form 1040, Schedule C, Line 31 net profit is zero or less and you have no employees, you are not eligible for a PPP loan.

Scenario 2: You have employees. You will use your 2019 Form 1040, Schedule C, Line 31 as in Scenario 1 and add to that your employee payroll costs, health and retirement benefits and state unemployment taxes.

Documentation required: 2019 Schedule C to substantiate the PPP loan amount, 2019 Form 941 (or other tax forms or equivalent payroll processor records) and state quarterly wage unemployment insurance tax report forms for each quarter in 2019 (or equivalent payroll records) along with evidence of any retirement and health insurance contributions.

You may use the PPP proceeds to provide for owner compensation based on Step 1a above in addition to your employee payroll costs, mortgage interest payments (which included real and tangible property such as building loans, auto loans, and equipment loans), rent payments and utilities (such as electric and gas).

It should be noted that the only eligible expenses the proceeds are allowed to be used on are for those in which the borrower claimed a deduction for on their 2019 Form 1040 Schedule C. This means you must have had the expense in 2019 to be able to use the PPP loan proceeds on 2020 expenses and receive forgiveness.

What is eligible for forgiveness?

The Treasury has provided some guidance on what is eligible for forgiveness. The total amount forgiven will depend, in part, on the total amount spent over the eight-week period:

  • Employee payroll costs up to a maximum of $15,385 per employee plus covered benefits such as health care (excluding owner), retirement contributions and state unemployment insurance
  • Owner compensation equivalent to eight-weeks worth of profit based on the 2019 Form 1040 Schedule C line 31. (Take 8/52nd of the net profit)
  • Payments on mortgage interest to the extent deductible on Form 1040 Schedule C
  • Payments for rent to the extent deductible on Form 1040 Schedule C
  • Utility payments under service agreements dated before February 15, 2020 to the extent deductible on Form 1040 Schedule C

As with prior guidance, at least 75 percent of the PPP loan proceeds must be used towards eligible payroll costs.

**Note: The interim guidance stated that if you were in operation on February 15, 2020 but were not in operation for 2019 and will file a Form 1040 Schedule C for 2020, the SBA will issue guidance at a later date.

Form more information you may visit the US Treasury website at: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

Disclaimer: This post was current as of the date of posting.  Any changes made to the law or regulations since original posting has not been incorporated.  Please view the recent postings for current information or contact us directly with any questions.

Teal, Becker & Chiaramonte Certified Public Accountants