The Treasury issued an additional Interim Final Rule (“IFR”) on April 14, 2020, for the Paycheck Protection Program (“PPP”) loans providing additional clarity on certain eligibility criteria, particularly for self-employed applicants. Below is a brief summary of the updates and clarifications. We have put this together in the interest of time, but we continue to review this to confirm our initial reading is correct and to confirm no other material terms are noteworthy.
Self-Employed Applicants:
- Eligibility for individuals with self-employment income
- If you have income from self-employment and you file a Form 1040, Schedule C then 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 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 taxes.
- Notably, and although the IFR mostly focuses on self-employed individuals who file Form 1040, Schedule C, the IFR clears up one area of confusion as to partnerships. The IFR indicates that individual partners of a partnership may not submit separate PPP loan applications; 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 entire partnership (which would cover both the partners and the employees).
- Calculating your loan amount (for self-employed individuals)
- If you have no employees, the following methodology should be used:
- Using your 2019 IRS Form 1040 Schedule C, line 31, identify the net profit amount (if in excess of $100,000, reduce to $100,000).
- Divide this amount by 12 to calculate the average monthly net profit amount.
- Multiply the average monthly net profit amount by 2.5.
- Add in any outstanding amount of an Economic Injury Disaster Loan (“EIDL”) EIDL that you seek to refinance.
- If you have employees, the following methodology should be used:
- Compute your 2019 payroll by adding the following:
- Using your 2019 IRS Form 1040 Schedule C, line 31, identify the net profit amount (if in excess of $100,000, reduce to $100,000);
- 2019 gross wages and tips paid to your employees using 2019 IRS Form 941 Taxable Medicare wages and tips plus any pre-tax employee contributions for health insurance or other benefits (all capped at $100,000); and
- 2019 employer health insurance contributions, retirement contributions and state and local taxes assessed on employee compensation.
- Divide this amount by 12 to calculate the average monthly net profit amount.
- Multiply the average monthly net profit amount by 2.5.
- Add in any outstanding amount of an EIDL that you seek to refinance.
- Compute your 2019 payroll by adding the following:
- Self-employed individuals must submit a 2019 Form 1040 Schedule C along with any supporting documentation to calculate employee costs, if applicable.
- If you have no employees, the following methodology should be used:
- Use of proceeds by individuals with income from self-employment
- The Treasury has limited the allowable uses to those types of expenses which the borrower made expenditures on in 2019, including:
- Owner compensation replacement, calculated based on 2019 net profits;
- Employee payroll costs, if applicable;
- Mortgage interest payments on any business mortgage obligation on real or personal property (i.e., the interest on your mortgage for the warehouse you store business equipment in or the interest on an auto loan for a vehicle you use to perform your business); business rent payments; and business utility payments. You must have claimed or be entitled to claim a deduction for such expenses in your 2019 Form 1040 Schedule C for them to be a permissible use during the 8-week period following disbursement;
- Interest payments on any other debt obligations that were incurred before February 15, 2020; and
- Refinancing an existing EIDL loan.
- At least 75% of the PPP loan proceeds must be used for payroll costs
- The Treasury has limited the allowable uses to those types of expenses which the borrower made expenditures on in 2019, including:
- Forgiveness eligibility (for self-employed applicants)
- The amount of loan forgiveness for self-employed individuals is limited to a proportionate 8-week share of 2019 net-profits, as reflected in the individuals 2019 Form 1040 Schedule C.
- Includes the actual amount spent over the covered period on:
- Payroll costs (up to $15,385 per individual for the eight-week period), as well as covered benefits for employees (but not owners) including health insurance, retirement contributions, and state taxes imposed on employee payroll paid by the employer;
- Owner compensation, calculated based on the 2019 net profits described above, with forgiveness limited to eight weeks’ worth of 2019 net profit;
- 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);
- Rent payments on lease agreement in force before February 15, 2020 (to the extent they are deductible on Form 1040 Schedule C); and
- Utility payments under service agreements dated before February 15, 2020 (to the extent they are deductible on Form 1040 Schedule C).
Additional Clarification Regarding Eligible Businesses
- 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 direct or equity holder follows the same process as any similarly situated customer or account holder of the Lender.
- A business that is otherwise eligible for a PPP loan is not rendered ineligible due to its receipt of legal gaming revenues if the business (i) derives less than one-third of its revenue from the gaming revenue or (ii) the following two conditions are satisfied; (a) the business’s legal gaming revenue (net of payouts but no other expenses) did not exclude $1million in 2019 and (b) the legal gaming revenue (net of payouts but no other expenses) comprised less than 50% of the business’s total revenue in 2019.