Paycheck Protection Program – Additional Guidance for Individuals with Self-Employment Income
The Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has made available up to $349 billion in potentially forgivable loans to small businesses for the payment of payroll costs and certain other expenses. We previously circulated a legal alert outlining the general terms and conditions of the PPP (available here) and a legal alert summarizing certain answers by the U.S. Small Business Administration (SBA) to frequently asked questions relating to the PPP (available here). Note that, as of the date of this legal alert, the $349 billion originally made available for the PPP has been exhausted, and Congress may not appropriate additional funds for the program. The SBA has announced that it is unable to accept new applications at this time for the PPP or the Economic Injury Disaster Loan COVID-19-related assistance program but that Economic Injury Disaster Loan applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.
On April 14, 2020, the SBA issued an interim final rule (the Interim Final Rule) that addresses the eligibility criteria for certain PPP loan applicants and requirements for certain pledges of PPP loans. The following is a summary of the provisions of the Interim Final Rule that relate to individuals with self-employment income.
Individuals with Self-Employment Income who File a Form 1040 Schedule C:
Eligibility. Individuals with self-employment income are eligible for PPP loans if:
- They were in operation on February 15, 2020;
- Their principal residence is in the United States; and
- They filed, or will file, a Form 1040 Schedule C for 2019.
Maximum Loan Amounts. The Interim Final Rule provides two methodologies for self-employed individuals who file a Form 1040 Schedule C to calculate their maximum loan amounts. One methodology applies to self-employed individuals with no employees, and the other applies to self-employed individuals who have employees.
Permitted Use of Proceeds. PPP loan proceeds may be used by self-employed individuals who file a Form 1040 Schedule C for:
- Replacement of owner compensation (based on 2019 net profit, as more particularly described in the Interim Final Rule);
- Payroll costs for employees whose principal residence is in the United States;
- Mortgage interest payments (but not prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., mortgage interest for a warehouse purchased for the business or interest on an auto loan for a vehicle used to perform the business); business rent payments (e.g., for a warehouse used in the business or a vehicle used to perform the business); and business utility payments (e.g., cost of electricity for a warehouse used in the business or gas used driving a vehicle used to perform the business); provided that the self-employed individual must have claimed or be entitled to claim a deduction for such expenses on his or her 2019 Form 1040 Schedule C in order to use the PPP loan proceeds to cover such expenses during the eight-week period following receipt of the loan; and
- Interest payments on other debt obligations incurred before February 15, 2020.
Loan proceeds may also be used to refinance an SBA Economic Injury Disaster Loan received between January 31, 2020 and April 3, 2020.
In any event, at least 75% of the PPP loan proceeds must be used to cover payroll costs.
Loan Forgiveness: Loan forgiveness will depend in part on amounts spent during the eight-week period following receipt of the loan on:
- Certain payroll costs (which exclude compensation in excess of $100,000 on an annualized basis for each employee);
- Replacement of owner compensation, limited to eight weeks’ worth of 2019 net profit, excluding certain sick or family leave equivalent amounts for which a credit is claimed under the Families First Coronavirus Response Act; and
- Interest on mortgage obligations on real or personal property incurred before February 15, 2020, rent payments on lease agreements in force before February 15, 2020, and utility costs under service agreements dated before February 15, 2020, in each case to the extent deductible on Form 1040 Schedule C.
The amount eligible for forgiveness may be reduced if employee headcount and compensation levels are not maintained, if applicable. Furthermore, at least 75% of the forgiven amount must be attributable to payroll costs.
Additional Guidance for New Businesses. The SBA intends to publish additional guidance for individuals with self-employment income who were in operation on February 15, 2020 but not in 2019 and who will file a Form 1040 Schedule C for 2020.
Partnerships and Their Partners:
Partners in a partnership may not apply for their own PPP loans as self-employed individuals. Instead, the partnership may apply for a PPP loan and report the self-employment income of its general active partners (up to $100,000 annualized per such partner) as a payroll cost. A limited liability company filing taxes as a partnership is treated as a partnership for this purpose.
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