In our previous article “SBA Parameters for the Paychecks Protection Program (PPP)” we outlined the general details of the program. Listed below are answers to questions for those individuals that want to participate in the program and are self-employed or are sole proprietors of a business.
The SBA will issue additional guidance for those individuals with self-employment income who; (1) were not in operation in 2019 but who were in operation on February 15, 2020 and (2) will file a Form 1040 Schedule C for 2020
I have income from self-employment, and I file Form 1040, Schedule C, am I eligible?
Yes. You need to also have meet other eligibility criteria such as, operational on February 15, 2020, principal place of residence is in the US and you filed or will file Form 1040 Schedule C for 2019.
Can partners in a partnership submit a separate PPP loan application for being considered self-employed?
No. The self-employment income of general active partners can be reported as payroll costs, up to $100,000 annualized on the PPP loan application filed by the partnership.
How do I calculate my maximum loan amount, if it’s just me, no employees?
Step 1: What is the dollar amount on 2019 Form 1040, Schedule C, Line 31?
- If the amount is zero or less, you are not eligible.
- If this amount is $100,000 or over, limit to $100,000
- otherwise use the number calculated.
Step 2: Calculate the average monthly net profit, divide the amount in Step 1 by 12
Step 3: Multiply the average monthly amount from Step 2 by 2.5
Step 4: Add the amount of any EIDL loan made between January 31, 2020 and April 3, 2020 that you seek to refinance, and subtract the amount of any advance under the EIDL COVID-19 loan
What kind of documentation do I need to bring, if I have no employees?
- Must provide a 2019 Form 1040 Schedule C regardless if you have filed a 2019 with the IRS.
- Any 2019 Form 1099-MISC with showing non-employee compensation in box 7.
- Invoice, bank statements or book of record that shows you are self-employed.
- Must bring an invoice, bank statement or book of record to establish you were in operation on or around February 15, 2020
How do I calculate my maximum loan amount, if I have employees?
Step 1: What is the dollar amount on 2019 Form 1040, Schedule C, Line 31?
- If the amount is zero or less, you are not eligible.
- If this amount is $100,000 or over, limit to $100,000
- otherwise use the number calculated.
Step 2: calculate 2019 gross wages and tips paid to employees by 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 wages paid to an individual employee in excess of $100,000 annualized and any amounts paid to an employee whose principal residence is outside the US
Step 3: calculate 2019 employer health insurance contributions (From 1040 Schedule C, Line 14), retirement contributions (Form 1040, Schedule C, Line 19) and state and local taxes assessed on compensation (SUTA from quarterly wage reporting forms).
Step 4: add the totals in the above steps to achieve 2019 payroll costs
Step 5: Calculate the average monthly net profit, divide the amount in Step 4 by 12
Step 6: Multiply the average monthly amount from Step 5 by 2.5
Step 7: Add the amount of any EIDL loan made between January 31, 2020 and April 3, 2020 that you seek to refinance, and subtract the amount of any advance under the EIDL COVID-19 loan
What kind of documentation do I need to bring, if I have employees?
- Must bring 2019 Form 1040 Schedule C
- Form 941 and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records
- Any retirement and health contributions if applicable
- Must bring a payroll statement or similar documentation from the pay period that covered February 15, 2020
What can I use the PPP loan proceeds for?
At least 75% of the PPP loan proceeds should be used for payroll costs.
- Owner compensation replacement, based on 2019 net profit (as calculated above in “How do I calculate my maximum loan amount, if it’s just me, no employees?” Step 1)
- Employee payroll costs which include;
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- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each
employee, calculated on a gross basis); - Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group
health care benefits including insurance premiums; and payment of any retirement
benefit; and - State and local taxes assessed on compensation
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each
- Mortgage interest (no pre-payment or principal) payments on any business mortgage obligation on real or personal property such as;
- Interest for mortgage on the warehouse where you store business equipment
- Interest on auto loan for vehicle used to perform business
- Business rent payments
- Business utility payments (electricity in the warehouse or gas used in business vehicle)
- Must have claimed or be entitled to claim these deductions on Form 1040, Schedule C for them to be permissible use during the 8-week period following first disbursement.
- Interest on any other debt obligation that were incurred before February 15, 2020 (not eligible for loan forgiveness)
- Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (maturity of EIDL will reset and match the PPP’s maturity)
- If the EIDL loan was not used for payroll costs it does not affect your eligibility for a PPP loan
- If the EIDL was used for payroll costs, your PPP loan must be used to refinance your EIDL loan
- Proceeds from any advance (up to $10,000) on the EIDL loan will be deducted from the loan forgiveness amount on the PPP
What is eligible for forgiveness?
The amount of forgiveness can be up to the full principal plus accrued interest. It will depend, in part on the total amount spent over the covered period on the following:
- Payroll costs, a max of ($15,385 per individual), up to $100,000 as well as covered benefits for employees (but not owners) including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by employer (such as unemployment insurance premiums)
- Owner compensation replacement, based on 2019 net profit (as calculated above in “How do I calculate my maximum loan amount, if it’s just me, no employees?” Step 1) limited to 8-weeks’ worth (8/52) of 2019 net profit, excluding any qualified sick leave equivalent amount for which a credit is claimed under 7002 Families First Coronavirus Response Act (FFCRA) or qualified family leave equivalent for which a credit is claimed under 7004 of FFCRA
- Payments on interest mortgage obligations on real or personal property incurred before February 15, 2020 to the extent they are deductible on Form 1040, Schedule C
- Rent payments on lease agreements in force before February 15, 2020 to the extent they are deductible on Form 1040, Schedule C
- Utility payments under service agreements dated Before February 15, 2020 to the extent they are deductible on Form 1040, Schedule C
Will the amount of my loan forgiveness be reduced if I lay off an employee, offer to rehire the same employee but the employee declined the offer?
Simply the answer is no. The SBA and Treasury Department intend to issue an interim final rule excluding laid off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act loan forgiveness reduction calculation. This interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
What documents do I need for forgiveness?
- Form 941 and state quarterly wage unemployment insurance form or equivalent payroll processor records that best correspond with the covered period, if you have employees
- Evidence of retirement and health insurance contributions
- Evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments
