SBA Guidance for Self-Employed and Independent Contractors

The Small Business Administration (“SBA”) has issued a supplemental Interim Final Rule (the “Rule”) providing additional guidance with respect to eligibility criteria under the Paycheck Protection Program (“PPP”). The Rule focuses primarily on qualified self-employed individuals as well as independent contractors. Here are the key components:

Who is eligible?

• Self-Employed individuals are eligible to receive a PPP loan if such individual (i) was in operation on February 15, 2020, (ii) collects self-employment income (e.g., independent contractors and sole proprietors), (iii) has a principal place of residence in the United States, and (iv) has filed or will file a Form 1040 Schedule C for the 2019 tax year.
• The Rule explicitly prohibits a partner in a partnership from submitting a separate PPP loan application as a self-employed individual. Instead, a partnership (taken together with its partners) is eligible for one PPP loan.   The self-employment income of general active partners may be reported as payroll costs (up to $100,000 annualized) on a PPP loan application filed by the partnership. This prohibition applies not only to active partners of a partnership, but also to members of a limited liability company that files as a partnership for tax purposes.
• The Rule notes that participation in the PPP may affect available relief under state administered unemployment programs, including under the CARES Act.

How is the maximum PPP loan amount calculated?

• For self-employed applicants without employees:

1. Determine 2019 net profit amount (IRS Form 1040 Schedule C, line 31). All amounts in excess of $100,000 are excluded. If the amount is zero or negative, the applicant is not qualified to receive a PPP loan.
2. Multiply the average monthly net profit amount by 2.5.
3. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that applicant is seeking to refinance, less the amount of any advance under an EIDL COVID-19 loan.

Note: Applicants are required to submit 2019 Form 1040 Schedule C, together with evidence of any non-employee compensation received (e.g., 2019 Form 1099-MISC, invoices, bank statements etc.), and records substantiating that such applicant was in operation as of February 15, 2020.

• For self-employed applicants with employees:

1. Compute 2019 payroll, which will be the sum of the following:

• Net profit amount as reflected on the applicant’s 2019 Form 1040 Schedule C, line 31, up to $100,000 annualized. If the net profit amount is negative, this component should be set to zero.
• 2019 gross wages and tips paid to employees (with a principal place of residence in the United States) on a quarterly basis, calculated using 2019 Form IRS Form 941 (Taxable Medicare Wages & Tips), plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from taxable wages. Amounts in excess of $100,000 per employee must be subtracted, as well as amounts paid to non-U.S. resident employees.
• 2019 employer health insurance contributions, retirement contributions and state and local taxes assessed on employee compensation

2. Calculate the average monthly amount (divide the amount in Step 1 by twelve).
3. Multiply the average monthly payroll amount 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 applicant is seeking to refinance, less the amount of any advance under an EIDL COVID-19 loan.

Note: Applicants are required to submit 2019 Form 1040 Schedule C, together with other tax forms or equivalent payroll processor records, and state quarterly wage unemployment insurance tax reporting forms from each quarter of 2019 (i.e., IRS Form 941). An applicant must also provide evidence of retirement and health insurance contributions, to the extent applicable, and a payroll statement or similar documentation to establish that such applicant was in operation as of February 15, 2020.

How can PPP loan proceeds be deployed?

The proceeds of a PPP loan may be used to cover the following operational expenses:

• Owner compensation replacement (calculated based on 2019 net profit amount).
• Employee payroll costs, as defined in the SBA’s initial Interim Final Rule, released on or about April 3, 2020. Borrower’s must use at least 75% of the PPP loan proceeds to fund payroll costs for continued operations, which costs will include the amount of any refinanced EIDL loans. Click here for our summary of the SBA’s preliminary guidance.
• (i) Mortgage interest payments on any business mortgage obligation on real or personal property, excluding mortgage prepayments or payments of principal (ii) business rent payments, and (iii) business utility payments. In order to use PPP funds to satisfy the foregoing, the applicant must have claimed, or be entitled to claim, a deduction for such expenses on its 2019 Form 1040 Schedule C.
• Interest payments on any other debt obligation incurred prior to February 15, 2020, which amounts are not eligible for loan forgiveness.
• Refinancing an existing SBA EIDL loan made between January 31, 2020 and April 3, 2020. Upon refinance, the maturity date of the EIDL loan will be adjusted to align with the PPP term of 2 years. If the applicant’s EIDL loan proceeds were used to cover payroll costs, then the PPP loan can only be used to refinance such existing obligation and any advance under such EIDL loan (up to $10,000) will be deducted from the loan forgiveness amount under the PPP.

What portion of a PPP loan is eligible for forgiveness?

Generally, up to 100% of the outstanding principal amount of the loan, plus accrued interest, will be eligible for forgiveness. The actual amount forgiven is contingent upon the total proceeds deployed over the eight-week covered period on the following:

• Payroll costs, including salary, wages and tips (up to $100,000 annualized), plus covered benefits for employees (not owners), inclusive of health care expenses, retirement contributions and state taxes imposed on employee payroll. For the eight-week covered period, payroll costs are capped at $15,385 per individual employee ($100,000 / 52 * 8).
• Owner compensation replacement, capped at eight weeks’ worth of 2019 net profit, explicitly excluding any qualified sick leave or family leave amount for which credit is claimed under the Families First Coronavirus Response Act.
• Payments of interest on mortgage obligations incurred prior to February 15, 2020, to the extent deductible on Form 1040 Schedule C (i.e., business mortgage payments).
• Rent payments under lease agreements in force prior to February 15, 2020, to the extent deductible on Form 1040 Schedule C (i.e., business rent payments).
• Utility payments under service agreements dated before February 15, 2020, to the extent deductible on Form 1040 Schedule C (i.e., business utility payments).

In addition to the above, the Rule expands eligibility under the PPP to the following otherwise eligible businesses:

• Businesses owned, in whole or in part, by an outside director or holder of less than 30% of the equity interests in a PPP Lender. Such applicants may apply directly with the commonly owned/controlled PPP Lender on whose board the director serves or in which the equity holder owns an interest. If such director or equity holder is also an officer or key employee of the subject PPP Lender, the PPP loan must be obtained from a different lender.
• Businesses that receive revenue from legal gaming activities, so long as (i) the existing standards contained in 13 CFR 120.110(g) are met, or (ii) (A) the businesses legal gaming revenue in 2019 (net of payouts) did not exceed $1 million, and (B) such revenue comprises less than 50% of the business’ total revenue in 2019.

We are continuing to monitor as additional guidance is released and will provide new Alerts as appropriate. Our attorneys are available to answer any questions with respect to the PPP and related federal and state level assistance programs.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.