On Friday March 27, 2020, the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) or “CARES Act,” providing for, among other things, the Paycheck Protection Program (“PPP”). On Thursday April 2, 2020, the U.S. Small Business Administration (SBA) issued an interim final rule the (“Initial Rule”), announcing the implementation of sections 1102 and 1106 of the CARES Act, relating, respectively, to the new PPP and forgiveness for qualifying loans under the PPP. On Friday April 3, 2020, the SBA issued an interim final rule which supplements the Initial Rule with additional guidance regarding the application of certain affiliate rules applicable to SBA’s implementation of sections 1102 and 1106 of the Cares Act.

On Tuesday April 14, 2020, the SBA issued an interim final rule which supplements the Initial Rule with, among other things, guidance for individuals with self-employment income who file a Form 1040, Schedule C (“SBA Interim Rule on Self-Employment”).

The SBA Interim Rule on Self-Employment is available at this link .

Among other things, the SBA Interim Rule on Self-Employment provides:

I. Guidance regarding individuals with self-employment income who file an IRS Form 1040, Schedule C.

  • Such individuals are eligible for a PPP loan if:
    • Business was in operation on February 15, 2020;
    • had self-employment income (as an independent contractor or a sole proprietor);
    • principal place of residence is in the United States; and
    • filed or will file a Form 1040 Schedule C for 2019.

Note: The SBA will issue new guidance for those individuals with self-employment income who were not in operation in 2019 but were on February 15, 2020 and will file a Form 1040 Schedule C for 2020.

  • A partner in a partnership (including a member of an LLC taxed as partnership) may not submit a separate PPP loan application for himself or herself as a self-employed individual, but can report such income as a payroll cost (up to $100,000 annualized) on a PPP loan application for the partnership (or LLC taxed as a partnership).
  • In calculating the maximum loan amount that can be borrowed when the self-employed individual has NO employees:
    • Step 1: use net profit amount from line 31 of 2019 IRS Form 1040 Schedule C up to $100,000;
    • Step 2: Calculate the average monthly net profit amount by dividing the amount from Step 1 by 12;
    • Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.
    • Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020 and April 3, 2020 that individual seeks to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Note: Substantiation for loan amount and eligibility will include copies of 2019 Form 1040 Schedule C; any 2019 IRS Form 1099-MISC detailing nonemployee compensation received; invoices, bank statement, or book of record to establish self-employment; 2020 invoice, bank statement, or book of record to establish operation on or around February 15, 2020.

  • In calculating the maximum loan amount that can be borrowed when the self-employed individual HAS employees:
    • Step 1: Compute 2019 payroll by adding the following:
      • Net profit amount on line 31 of self-employed individual’s 2019 Form 1040 up to $100,000
      • 2019 gross wages and tips paid to individual’s employees whose principal place of residence is in the United States from 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.
    • Step 2: Calculate the average monthly amount by dividing the amount from Step 1 by 12.
    • Step 3: Multiply the average monthly amount from Step 2 by 2.5.
    • Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that individual seeks to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Note: Substantiation for loan amount and eligibility will include copies of 2019 Form 1040 Schedule C; Form 941 (or other tax forms or 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; payroll statement or similar documentation from the pay period that covered February 15, 2020 to establish operation on February 15, 2020.

  • PPP loan proceeds can be used for the following:
    • Owner compensation replacement (as calculated above);
    • If business has employees, employee payroll costs (as defined in the Initial Rule) for employees whose principal place of residence is in the United States;
    • To the extent the self-employed individual claimed or is entitled to claim such items as deductions on 2019 Form 1040 Schedule C, mortgage interest payments (but not prepayments or principal payments) on any business mortgage on real or personal property, business rent payments, and business utility payments;
    • Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness); and
    • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (maturity will be reset to PPP’s maturity of two years).
  • At least 75% of the PPP loan proceeds must be used for payroll costs.
  • Amount of PPP loan that is eligible for forgiveness:
    • The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the eight-week period following first disbursement of the loan 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 insurance premiums);
      • owner compensation replacement, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit (excluding, to the extent a credit is claimed, any qualified sick leave or qualified family leave under the Families First Coronavirus Response Act);
      • 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 payments); and
      • utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).

Note: 75 percent of the amount forgiven must be attributable to payroll costs.

  • Documentation required to be submitted to lender to substantiate loan forgiveness request:
    • if individual has employees, Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records (with evidence of any retirement and health insurance contributions).
    • Whether or not individual has employees, individual must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments if loan proceeds are used for those purposes.
    • The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week period.

II. Clarifies that eligible businesses:

  • Owned by directors or shareholders of a PPP lender may, in the circumstances set forth in the SBA Interim Rule on Self-Employment, be able to apply for a PPP loan through the lender with which they are associated.
  • That receive revenue from legal gaming may, in the circumstances set forth in the SBA Interim Rule on Self-Employment, be eligible for a PPP Loan.

III. Clarifies that the requirements for loan pledges under 13 CFR 120.434 do not apply to PPP loans pledged for borrowings from a Federal Reserve Bank or advances by a Federal Home Loan Bank.

 

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