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The SBA Provides Additional Guidance on the Paycheck Protection Program

Posted by Sweeney Conrad on Apr 15, 2020 6:26:08 PM

Business OwnerThe Paycheck Protection Program (PPP) was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide cash to businesses impacted by the COVID-19 pandemic. These funds can be used to pay employees, along with other expenses such as health insurance premiums, rent or mortgage payments, and utilities. Loans under the PPP will be 100% guaranteed by U.S. Small Business Administration (SBA), and the full amount of the loans and any accrued interest may qualify for loan forgiveness.

On April 14, the SBA released additional guidance on some of the areas of uncertainty surrounding the program.

Loan Amounts and Forgiveness Calculations for Individuals with Self-Employment Income:

Individuals with self-employment income (independent contractors or sole proprietors) who:

  • Have principal residence in the United States
  • Were in operation on February 15, 2020, and
  • Filed or will file a Form 1040 Schedule C for 2019

are eligible for a PPP loan. However, if you are a partner in a partnership you may not submit a separate PPP loan 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 a partnership.
  • Partnerships are eligible for PPP loans, however, in an effort to fill as many loans as possible by the June 30, 2020 deadline, partnerships and partners are limited to one PPP loan.

How to Calculate Your Maximum PPP Loan Amount

If you have no employees, you can calculate your maximum loan amount by:

  1. Find 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 the amount is zero or less, you are not eligible for a PPP loan.
  2. Calculate the average monthly net profit amount, by dividing that number by 12 months.
  3. Multiply the average monthly net profit amount from step 2 by 2.5
  4. Add 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 the EIDL COVID-19 loan (as it does not have to be repaid).

Required documentation for PPP loan application for self-employed individuals with no employees:

  • The 2019 Form 1040 Schedule C, regardless of whether you have filed your 2019 tax return with the IRS yet.
  • 2019 IRS Form 1099-MISC detailing non-employee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed.
  • 2020 invoice, bank statement or book of record to establish you were in operation on or around February 15, 2020.

If you have employees, you can calculate your maximum loan amount by:

  1. Compute 2019 payroll by adding the following:
    1. Your 2019 Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized. If the amount is over $100,000 reduce it to $100,000. If this amount is less than zero, set the amount at zero.
    2. 2019 gross wages and tips paid to your employees whose principal place of residence is in the U.S. 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 U.S; and
    3. 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 compensations (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).
  2. Calculate the average monthly net profit amount, by dividing that number by 12 months.
  3. Multiply the average monthly amount from Step 2 by 2.5.
  4. Add 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 the EIDL COVID-19 loan (as it does not have to be repaid).

 

Required Documentation for PPP loan application for self-employed individuals with employees:

  • The 2019 Form 1040 Schedule C, Form 941 (or other tax forms of equivalent payroll processor records containing similar information)
  • State quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records.
  • Evidence of any retirement and health insurance contributions, if applicable.
  • A payroll statement or similar documentation from the pay period that covered February 15, 2020.

Funds from PPP loans can be used by individuals with income from self-employment to cover:

  • Owner compensation replacement, calculated based on 2019 net profit.
  • Employee payroll costs for employees whose principal residence is in the U.S.
  • Mortgage interest payments (but not mortgage payments or principal payments), business mortgage obligation on real or personal property, business rent payments, business utility payments. You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan.
  • Interest payments or any other debt obligations that were incurred before February 15, 2020.
  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. (restrictions apply based on what your EIDL was used for)
  • At least 75 percent of the PPP loan shall be used for payroll costs.

For additional updates, as well as Frequently Asked Questions regarding the Payroll Protection Program visit our Business Owners Toolkit.

Topics: Tax, News, COVID-19

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