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Updated PPP Guidance: Self-Employed Business Owners and Partnerships

By Travis Miskowitz

Paycheck Protection Program Updates – April 14, 2020

NOTE: As of April 16, 2020 the SBA is advising applicants that funds for the PPP loan program have been exhausted. Congress is currently negotiating and working to infuse an additional $250 billion into the program. This guidance is applicable when the SBA begins accepting applications again. We will continue to provide updates as more information becomes available.

On April 14, 2020 the U.S. Small business Administration (SBA) issued an updated interim final rule which supplements the First PPP Interim Final Rule which was issued on April 2, 2020. This updated interim final rule provides guidance to self-employed individuals such as independent contractors, sole proprietors, partners in a partnership, members in an LLC and other individuals who use Form 1040, Schedule C when they file their tax return. This updated interim final rule applies to all applications under the PPP loan program through June 30, 2020 or until funds are exhausted.

Below are some key takeaways:

You are eligible for a PPP loan if you meet the following criteria: 

  • You were in operation on February 15, 2020
  • You are an individual with self-employment including independent contractor or sole proprietor
  • Principal place of residence is in the United States
  • You filed Form 1040 Schedule C for 2019

Partnership Application

If you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.

The SBA will issue additional guidance for self-employed individuals who:

  • Were not in operation in 2019 but who were in operation on February 15, 2020
  • Will file a Form 1040 Schedule C for 2020

How to calculate maximum loan amounts: 

Self-employed business owner WITH NO employees

Step 1Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount. If this amount is over $100,000, reduce it to $100,000.

If your net profit is zero or less, you are not eligible for a PPP loan
Step 2Calculate the average monthly net profit amount (divide the amount from step 1 by 12)
Step 3Multiply the average monthly net profit by 2.5
Step 4Add the outstanding amount of any Economic Injury Disaster Loan (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 (because it does not need to be repaid)
Documentation to Submit
Regardless of whether or not you have filed a 2019 tax return with the IRS:

-You must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount AND

-A 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, OR book of record that establishes you are self-employed.

-You MUST provide a 2020 invoice, bank statement, OR book of record to establish you were in operation on or around February 15, 2020.

Self-employed business owner WITH employees

Step 1Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount. If this amount is over $100,000, reduce it to $100,000.

If your net profit is zero or less, you are not eligible for a PPP loan.
Step 22019 gross wages and tips paid to your employees whose principal place of residence is in the United States computed using:

-2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips;

-Subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States; AND

-2019 employer health insurance contributions (health insurance component of Form 1040 Schedule C line 14),

-Retirement contributions (Form 1040 Schedule C line 19), and

-State and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).
Step 3Calculate the average monthly amount (divide the amount from step 1 by 12)
Step 4Multiply the average monthly net profit by 2.5
Step 5Add the outstanding amount of any Economic Injury Disaster Loan (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 (because it does not need to be repaid)
Documentation to submit

Regardless of whether or not you have filed a 2019 tax return with the IRS:

-2019 Form 1040 Schedule C

-Form 941 OR other tax forms OR equivalent payroll processor records containing similar information

-Evidence of any retirement and health insurance contributions

-Payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020

Participation in PPP may affect state-administered unemployment compensation

Participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits.

Use of PPP Loan Proceeds for Individuals With Income From Self-Employment Who File 2019 Form 1040, Schedule C

The proceeds of a PPP loan are to be used for the following:

  • Owner compensation replacement, calculated based on 2019 net profit.
  • Employee payroll costs. Payroll costs include:
    • Salary, wages and tips
    • Covered benefits for employees (but not owners), including health care expenses
    • Retirement contributions
    • State taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums)
    • Up to $100,000 of annualized pay per employee
    • No more than 25 percent of the forgiven amount may be for non-payroll costs.
  • Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property
  • Business rent payments
  • Business utility payments (must have claimed or be entitled to claim a deduction for utility expenses on 2019 Form 1040, Schedule C for expenses to be permissible during the eight-week period following the first disbursement of the loan (the “covered period”).
  • Interest payments on any other debt obligation incurred before February 15, 2020. However, interest payments on other debt obligations are not eligible for PPP loan forgiveness.
  • Refinancing an SBA EIDL made between January 31, 2020, and April 3, 2020 (maturity will be reset to PPP’s maturity of two years). If you received an SBA EIDL between January 31, 2020, and April 3, 2020, you can apply for a PPP loan. If an EIDL was used for payroll costs, the PPP loan must be used to refinance the EIDL . Proceeds from any advance up to $10,000 on an EIDL will be deducted from the loan forgiveness amount on the PPP loan.

Although the CARES Act makes businesses in operation on February 15, 2020, eligible for PPP loans, self-employed individuals will need to rely on their 2019 Form 1040, Schedule C, which provides verifiable documentation on expenses between January 2, 2019, and December 31, 2019.

What amounts will be eligible for forgiveness

The actual amount of loan forgiveness will depend on the total amount spent over the covered period on:

  • Payroll costs up to $100,000 of annualized pay per employee
    • For eight weeks, a maximum of $15,385 per individual (8 weeks /52 weeks)
    • Covered benefits for employees (but not owners) including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums)
  • Owner compensation replacement, calculated based on 2019 net profit, with forgiveness amounts limited to eight weeks’ worth of 2019 net profit, but excluding any qualified sick leave equivalent amount for which a credit is claimed under Section 7003 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or a qualified family leave equivalent amount for which a credit is claimed under Section 7004 of FFCRA.
  • Payments of interest on mortgage obligations on real property incurred before February 15, 2020, to the extent they are deductible on Form 1040, Schedule C (business rent payments).
  • Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040, Schedule C (business utility payments).

Independent contractors, sole proprietors and individuals with income from self-employment will need to provide their lender with the following documents with a request for loan forgiveness:

  1. Borrower certification that the documentation presented in connection with forgiveness is true and correct, and the amount for which forgiveness is requested that was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation or make covered utility payments, as required under Section 1106(e)(3) of the CARES Act
  2. Documents reflecting the number of employees (Form 941)
  3. State quarterly wage unemployment insurance tax reporting forms or the equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions)
  4. Evidence of business rent, business mortgage interest payments on real or personal property, and utility payments during the covered period if you used loan proceeds for those purposes

Questions or concerns about this or any other aspect of the CARES Act stimulus bill? We're standing by and ready to help.

Paycheck Protection, PPP, Travis Miskowitz

Comments (5)

    • We agree with you, James. The best we can do is arm ourselves with knowledge for when places do start opening up. Thank you for leaving a note and stay safe.

  • I am a one man photography shop. I am being told I am entitled to $2000. is this right ? What forms do I have to file?

    • Hi Joseph – You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. All loans will have the same terms regardless of lender or borrower. A list of participating lenders as well as additional information and full terms can be found at http://www.sba.gov. For more details, you can visit our FAQ page.

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