New PPP Funding and Guidance on Use of PPP Loans for Self-Employed Individuals
As the COVID-19 emergency crisis continues, we want to provide an update on
two recent actions dealing with the Paycheck Protection Program: (1) the
Paycheck Protection Program and Health Care Enhancement Act (Act), signed by
President Trump on April 24, 2020, which provides additional funding under
the CARES Act, and (2) the SBA Final Interim Rule (Rule) issued on April 14,
2020, which clarified the use of PPP loans for self-employed individuals.
The two actions are summarized below.
Paycheck Protection Program and Health Care Enhancement Act
The Act builds on the CARES Act
passed in March and appropriates $484 billion in additional funding for
small businesses and hospitals under the CARES Act programs. Notably, the
Act appropriates an additional $322 billion for the very popular Paycheck
Protection Program (PPP) loans. No substantive changes were made in the Act
to the PPP loan program; it simply provides more dollars to permit
additional loans to be issued to small businesses who were shut out during
the first round of lending.
The Act provides the following funding:
Small Businesses: $384 Billion
$322 billion for the Paycheck Protection Program. Of that amount, $60
billion is allocated to Community Financial Institutions, defined as
minority depository institutions, certified development companies, microloan
intermediaries, and credit unions, in order to allow for smaller lending
institutions with specific dollars so they can participate in the program;
$60 billion for the Economic Injury Disaster Loans Program; and
$2 billion for SBA Administrative Costs.
Healthcare Funding: $100 Billion
SBA Guidance for Self-Employed Individuals under the PPP Program
On April 14, 2020, the SBA issued a new
interim Rule providing further
guidance for independent contractors and self-employed people under the
Paycheck Protection Program. The most important aspect of this new guidance
is that self-employed individuals are eligible for a forgivable PPP loan for
up to eight weeks of their 2019 net profit (still subject to the cap of an
annualized amount of $100,000).
A summary of the key provisions of this Rule include the following (we note
that this summary does not include many details set forth in the Rule; one
should consult the Rule itself when making the necessary calculations):
Eligible Self-Employed Individuals: Individuals with self-employment income
are eligible for a PPP loan if the individual:
was in operation on February 15, 2020;
is an individual with self-employment income (such as an independent
contractor or sole proprietor);
has a principal place of residence in the United States; and
filed, or will file, a Form 1040 Schedule C for 2019.
Loan Amount: Individuals with no employees should calculate their maximum
loan amount as follows:
Step 1: Find your 2019 IRS 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). If this amount is over $100,000, reduce it to $100,000. If this
amount is zero or less, you are not eligible for a PPP loan. This is
referred to in the Rule as "owner compensation;"
Step 2: Calculate the average monthly net profit amount (divide the amount
from Step 1 by 12); and
Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.
Individuals with employees should calculate their loan amount as follows:
Step 1: Compute 2019 payroll by adding the following:
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 this amount is over $100,000, reduce it to $100,000, if this
amount is less than zero, set this amount at zero (again referred to in the
Rule as "owner compensation");
2019 gross wages and tips paid to your employees whose principal place of
residence is in the United States; and
2019 employer health insurance contributions, retirement contributions,
and state and local taxes assessed on employee compensation (primarily
unemployment insurance premiums).
Step 2: Calculate the average monthly amount (divide the amount from Step 1
Step 3: Multiply the average monthly amount from Step 2 by 2.5.
If you received an Economic Injury Disaster Loan (EIDL) between January 31,
2020 and April 3, 2020, you also are eligible to obtain funding to refinance
that amount, less the amount of any advance under an EIDL COVID-19 loan
(because it does not have to be repaid).
Permitted Uses for Individuals: An individual may use PPP loans for the
owner compensation replacement;
employee payroll costs, if you have employees;
mortgage interest payments (but not mortgage prepayments or principal
payments) on any business mortgage obligation on real or personal property
(e.g., the interest on your mortgage for the warehouse you purchased to
store business equipment or the interest on an auto loan for a vehicle you
use to perform your business), business rent payments (e.g., the warehouse
where you store business equipment or the vehicle you use to perform your
business), and business utility payments (e.g., the cost of electricity in
the warehouse you rent or gas you use driving your business vehicle);
interest payments on any other debt obligations that were incurred before
February 15, 2020 (such amounts are not eligible for PPP loan forgiveness);
refinancing an SBA EIDL loan made between January 31, 2020 and April 3,
The Rule further limits a self-employed individual's use of PPP loan
proceeds to those allowable uses listed above for which the borrower made
expenditures in 2019. SBA states that this limitation is required to support
the applicant's required certification that the loan is necessary to
"support the ongoing operations" of the borrower (as opposed to business
expansion). Also, the requirement remains that 75% of the PPP loan proceeds
must be used for payroll costs.
Loan Forgiveness for Self-Employed Individuals: The full PPP loan principal
amount plus accrued interest is eligible for forgiveness. The amount of
forgiveness will be the total amount spent during the covered period on:
payroll costs including salary, wages, and tips, up to $100,000 of
annualized pay per employee (for eight weeks, a maximum of $15,385 per
individual), 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 the employer (such as unemployment
owner compensation replacement, calculated based on 2019 net profit, with
forgiveness of such amounts limited to eight weeks' worth (8/52) of 2019 net
payments of interest on mortgage obligations on real or personal property
incurred before February 15, 2020, to the extent they are deductible on Form
1040 Schedule C (business mortgage payments);
rent payments on lease agreements in force before February 15, 2020, to
the extent they are deductible on Form 1040 Schedule C (business rent
utility payments under service agreements dated before February 15, 2020
to the extent they are deductible on Form 1040 Schedule C (business utility
The Rule states that "it is appropriate to limit the forgiveness of owner
compensation replacement for individuals with self-employment income who
file a Schedule C to eight weeks' worth (8/52) of 2019 net profit." The Rule
state states that "[t]his is most consistent with the structure of the Act
and its overarching focus on keeping workers paid, and will prevent
windfalls that Congress did not intend."
Partners in Partnerships: The Rule makes clear that partners in a
partnership may not submit separate PPP applications as self-employed
individuals, but must file on behalf of the partnership. The Rule states:
However, 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. Partnerships are
eligible for PPP loans under the Act, and the Administrator has determined,
in consultation with the Secretary of the Treasury (Secretary), that
limiting a partnership and its partners (and an LLC filing taxes as a
partnership) to one PPP loan is necessary to help ensure that as many
eligible borrowers as possible obtain PPP loans before the statutory
deadline of June 30, 2020.
Borrowers Associated With Lenders: The Rule states that businesses owned by
directors or shareholders of an approved PPP lender are eligible to apply
for a PPP loan in certain circumstances.
Sacks Tierney has
qualified attorneys to answer your questions about these
provisions and to help guide your business if you wish to apply for and
obtain any of the assistance available through the CARES Act.