SBA Issues Second Interim Final Rule – Clarification of Partnership Filings, Individuals with Self-Employment Income and Affiliation Rules
The CARES Act was enacted to provide immediate assistance to individuals, families and organizations affected by the COVID-19 pandemic. Among the provisions contained in the CARES Act are provisions authorizing the SBA to guarantee loans under the PPP temporarily. Borrowing under the PPP will be 100% guaranteed by the SBA, and the full principal amount of the loans and any accrued interest may qualify for loan forgiveness.
On April 2, 2020, the U.S. Small Business Administration (SBA) posted an interim final rule (the First PPP Interim Final Rule) announcing the implementation of sections 1102 and 1106 of the CARES Act. The legislation temporarily added the Paycheck Protection Program (PPP), to the SBA’s 7(a) Loan Program. The CARES Act also provides forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP. The PPP is intended to provide economic relief to small businesses nationwide adversely impacted by COVID-19.
A second interim final rule issued on April 14, 2020 (the Second PPP Interim Final Rule) supplements the first rule with guidance for individuals with self-employment income who file a Form 1040, Schedule C. This rule also addresses eligibility issues for particular business concerns and requirements for individual pledges of PPP loans.
Individuals with self-employment income who file a Form 1040, Schedule C
I have income from self-employment and file a Form 1040, Schedule C. Am I eligible for a PPP Loan?
You are eligible for a PPP loan if:
- You were in operation on February 15, 2020
- You are an individual with self-employment income (such as an independent contractor or a sole proprietor)
- Your principal place of residence is in the United States
- You filed or will file a Form 1040 Schedule C for 2019
However, if you are a partner in a partnership, you 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.
How do I calculate the maximum amount I can borrow, and what documentation is required?
How you calculate your maximum loan amount depends upon whether or not you employ other individuals. If you have no employees, the following methodology should be used to calculate your maximum loan amount:
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.
Step 2: Calculate the average monthly net profit amount (divide 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 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 non-employee 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 publication of record to prove 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:
Step 1: Compute 2019 payroll by adding the following:
- 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
- Gross wages and tips (2019) 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 over $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States
- Employer (2019) 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)
Step 2: Calculate the average monthly amount (divide 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 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. A payroll statement or similar documentation from the pay period that covered February 15, 2020, must be provided to establish you were in operation on February 15, 2020.
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.
- Owner compensation replacement, calculated based on 2019 net profit (see 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 interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (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 weeks following the first disbursement of the loan (the “covered period”). For example, if you did not claim or are not entitled to claim utility 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 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
Are there any other restrictions on how I can use PPP loan proceeds?
Yes. At least 75% of the PPP loan proceeds shall be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included. The rationale for this 75% floor is contained in the First PPP Interim Final Rule.
What amounts shall be 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 covered period 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, calculated based on 2019 net profit as described 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) or qualified family leave equivalent amount for which a credit is claimed under FFCRA
- 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)
- Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments)
What documentation will I be required to submit to my lender with my request for the loan forgiveness?
In addition to the borrower certification required by the CARES Act, to substantiate your request for loan forgiveness, if you have employees, you should submit 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.
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 covered period.
Clarification regarding eligible businesses
Are eligible businesses owned by directors or shareholders of a PPP lender permitted to apply for a PPP loan through the lender with which they are associated?
The Administrator recognizes that, unlike other SBA loan programs, the financial terms for PPP loans are uniform for all borrowers, and the standard underwriting process does not apply because no creditworthiness assessment is required for PPP loans. Consequently, there is no meaningful risk of underwriting bias or below-market rates and terms. The Administrator also recognizes that many directors and equity holders of PPP lenders are owners of unrelated businesses.
For those reasons, the Administrator, in consultation with the Secretary, has determined that SBA regulations shall not apply to prohibit an otherwise eligible business owned (in whole or part) by an outside director or holder of a less than 30 percent equity interest in a PPP lender from obtaining a PPP loan from the PPP lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the lender. Favoritism by the lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The Administrator cautions, however, that lenders should comply with all other applicable state and federal regulations concerning loans to associates of the lender. Lenders should also consult their internal policies concerning lending to individuals or entities associated with the lender.
The preceding paragraph does not apply to a director or owner who is also an officer or key employee of the PPP lender. Officers and key employees of a PPP Lender may obtain a PPP Loan from a different lender, but not from the PPP lender with which they are associated. The SBA also reminds lenders that the “Authorized Lender Official” for each PPP loan is subject to the limitations described in the Lender Application Form, which states in relevant part: “Neither the undersigned Authorized Lender Official nor such individual’s spouse or children has a financial interest in the Applicant [Borrower].”
Are businesses that receive revenue from legal gaming eligible for a PPP Loan?
A business that is otherwise eligible for a PPP Loan is not rendered ineligible due to its receipt of legal gaming revenues if the existing standard in 13 CFR 120.110(g) is met or the following two conditions are satisfied:
- The business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019
- Legal gaming revenue (net of payouts but not other expenses) comprised less than 50% of the business’s total revenue in 2019
Businesses that received illegal gaming revenue are categorically ineligible.
We will continue to keep everyone updated on the latest guidance as it pertains to the administration of the CARES Act. Learn how our CARES Act Response Team can help your organization.
For additional resources, please visit our COVID-19 Resources website.