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PPP Loans and Self-Employed Individuals

 

 

Yesterday, the Small Business Administration (SBA) issued interim final rules clarifying eligibility and application processes for self-employed individuals. The rules clarify that self-employed individuals who filed Schedule C with their federal income taxes and were operating on February 15, 2020, are eligible for Paycheck Protection Program (PPP) loans. The rules also clarified that Partnerships are eligible, and the amount of the Partnership’s loan will count up to $100,000 of net profit for each partner as payroll costs in applying for the PPP loan. Individual partners will not be allowed to apply for PPP loans.

The rules also provide the process for self-employed applicants to calculate their maximum loan amount, depending on whether they have employees or not. Self-employed PPP loan recipients may use the proceeds for “owner compensation replacement,” Assuming no employees and $150,000 of Schedule C 2019 net income, the loan amount would be calculated based on $100,000 divided by 12 months multiplied by 2.5 resulting in a loan amount of $20,833. The rules clarify that self-employed health insurance and retirement contributions are not included in calculating the loan or in the forgiveness calculation.

Additionally, the support required for loan approval will be a copy of the 2019 Schedule C, even if the 2019 return has not yet been filed. You will also need to provide any Form 1099-MISC that you have received from customers, and documentation showing that you were in operation on February 15, 2020. This documentation could include an invoice, bank statement or other documentation that establishes you are self-employed. Guidance for Schedule C’s that were not in operation in 2019, but were in operation on February 15, 2020 have yet to be issued.

Further, the interim rules go on to describe how the PPP loan proceeds can be utilized by self-employed individuals who file a Schedule C as follows:

  • Owner compensation replacement, calculated based on 2019 net profit as described above;
  • 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;
  • Mortgage and secured interest payments (but not mortgage interest prepayments or principal payments) on any business mortgage or secured business loan 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).  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.
  • 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 Economic Injury Disaster Loan (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.

 As always, if you need any clarification on the PPP loans or other provisions of the CARES Act, please contact a CironeFriedberg professional. We would be happy to help you determine your eligibility for these government programs.

 


 

CironeFriedberg, LLP
CironeFriedberg, LLP
info@cironefriedberg.com
24 Stony Hill Rd, Bethel, CT 06801
(203) 798-2721
6 Research Dr, Suite 450, Shelton, CT 06484
(203) 366-5876
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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