PPP Loan requirements for self-employed


UPDATED 4/15/2020


PPP Loan requirements for self-employed and partnerships

General requirements

You are eligible for a PPP loan if: (i) you were in operation on February 15, 2020; (ii)

you are an individual with self-employment income (such as an independent contractor or

a sole proprietor); (iii) your principal place of residence is in the United States; and (iv)

you filed or will file a Form 1040 Schedule C for 2019.

Rules for Partners in a partnership

Partnerships 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.

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

Permitting partners to apply as self-employed individuals would create unnecessary

confusion regarding which entity, the partner or the partnership, applies for partner and

LLC member income, and would generate loan proceeds use coordination and

allocation issues. Rent, mortgage interest, utilities, and other debt service are generally

incurred at the partnership level, not partner level, so it is most natural to provide the

funds for these expenses to the partnership, not individual partners.

In addition, you should be aware that participation in the PPP may affect your eligibility for state administered unemployment compensation or unemployment assistance programs,

Self-employment rules

If you have no employees, the following methodology should be used to calculate your maximum loan amount:

i. 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.

ii. Step 2: Calculate the average monthly net profit amount (divide the amount from

Step 1 by 12).

iii. Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.

iv. Step 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 an EIDL COVID-19 loan

(because it does not have to be repaid).

Regardless of whether 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.

If you have employees, the following methodology should be used to calculate your

maximum loan amount:

i. Step 1: Compute 2019 payroll by adding the following:

a. 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;

b. 2019 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

c. 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).

ii. Step 2: Calculate the average monthly amount (divide the amount from Step 1 by

12).

iii. Step 3: Multiply the average monthly amount from Step 2 by 2.5.

iv. Step 4: Add the outstanding amount of any 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 have to be repaid).

You must supply your 2019 Form 1040 Schedule C, Form 941 (or other tax forms or

equivalent payroll processor records containing similar information) and state quarterly

wage unemployment insurance tax reporting forms from each quarter in 2019 or

equivalent payroll processor records, along with evidence of any retirement and health

insurance contributions, if applicable.

How can PPP loans be used by individuals with income from self-employment who file a

2019 Form 1040, Schedule C?

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

i. Owner compensation replacement, calculated based on 2019 net profit as

described in Paragraph 1.b. above.

ii. Employee payroll costs (as defined in the First PPP Interim Final Rule) for

employees whose principal place of residence is in the United States, if you have

employees.

iii. 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),

Business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use

driving your business vehicle).

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 (the “covered period”). For example, if you did not claim or are not

entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the covered period.

iv. Interest payments on any other debt obligations that were incurred before

February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).

v. 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). If you received an

SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a

PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your

eligibility for a PPP loan. If your EIDL loan 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 loan.

Tt is appropriate to limit self-employed individuals’ (who file a Form 1040 Schedule C) use of loan proceeds to those types of allowable uses for which the borrower made expenditures in 2019. The Administrator has determined that this limitation on self-employed individuals who file a Form 1040 Schedule C is consistent with the borrower certification required by the Act;

specifically, that the PPP loan is necessary “to support the ongoing operations” of the

borrower. The Administrator and the Secretary thus believe that this limitation is

consistent with the structure of the Act to maintain existing operations and payroll and

not for business expansion

Self-employed individuals will need to rely on their 2019 Form 1040 Schedule C, which provides verifiable documentation on expenses between January 1, 2019 and December 31, 2019. For individuals with income from self-employment from 2019 for which they have filed or will file a 2019 Form 1040 Schedule C, expenses incurred between January 1, 2020 and February 14, 2020 may not be considered because of the lack of verifiable documentation on expenses in this period.

SBA will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a

Form 1040 Schedule C for 2020.

Loan 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 covered period on:

i. 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);

ii. owner compensation replacement, calculated based on 2019 net profit as

described in Paragraph 1.b. above, with forgiveness of such amounts limited to

eight weeks’ worth (8/52) of 2019 net profit, but excluding any qualified sick

leave equivalent amount for which a credit is claimed under section 7002 of the

Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or

qualified family leave equivalent amount for which a credit is claimed under

section 7004 of FFCRA;

iii. 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);

iv. 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

v. utility payments under service agreements dated before February 15, 2020 to the

extent they are deductible on Form 1040 Schedule C (business utility payments).


Loan forgiveness documentation

Form 941 and state quarterly wage unemployment insurance tax reporting forms or

equivalent payroll processor records that best correspond to the covered period (with

evidence of any retirement and health insurance contributions).

Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.

For purposes of loan forgiveness it is appropriate to require self-employed individuals to rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner during the covered period


The Administrator, in consultation with the Secretary, has determined 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. This 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.

it is appropriate to limit loan forgiveness to a proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C. This is because many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the Act. For example, many such individuals operate out of either their homes, vehicles, or sheds and thus do not incur qualifying mortgage interest, rent, or utility payments.

As a result, most of their receipts will constitute net income. Allowing such a self employed

individual to treat the full amount of a PPP loan as net income would result

in a windfall.

Click here for more details on the Paycheck Protection Program.

Feel free to reach out to Paula, Molly, or me with any questions. Also continue to follow EDGe on social media and on our EDGe blog for updates on other small business assistance measures.

hello@edgebusinessplanning.com

https://www.edgebusinessplanning.com/financialedge

Eric Glymph Financial Strategist / Founder EDGe Business Planning www.EDGeBusinessPlanning.com

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