Paycheck Protection Program Loans for Taxpayers with Self-Employment Income

Update May 28, 2020

House passed the Paycheck Protection Program Flexibility Act today. The Senate is expected to vote next week but likely the Senate bill will have different provisions than the House approved today.

Update May 26, 2020

Treasury Department issued two IFRs late Friday, 5/22:

  1. IFR – Loan Forgiveness
    • Restates that eligible expenses can be paid during the Covered Period or incurred before the end of the period and paid at the next regular payment date
    • Employee bonuses and hazard pay can be included in eligible payroll costs up to the $15,385 total compensation maximum per employee
    • Owner-employee compensation (for C and S-Corp shareholders) is capped at 8/52 of their 2019 compensation (or $100K). No test of minimum ownership was provided
    • Owner-employees are also capped by their 2019 retirement plan and health care contribution amounts
    • Compensation equivalent for general partners are capped at 92.35% of 2019 SE income (less section 179 and unreimbursed expenses)
    • For the 25% reduction wage test it appears the Jan-March, 2020 compensation should include only “base salary or wages” (not total compensation including bonuses)
    • Lenders have 60 days to review Application and SBA has 90 days to submit funds for forgiven portion to lender
    • SBA will review borrower’s basis for required certifications
    • No guidance re: 2019 retirement plan contributions, rehire June 30 and fire July 1
  2. IFR – Loan Review
    • SBA “may review ANY PPP loan” “at any time” for the following:
      • Borrower eligibility
      • Loan amount received
      • Use of loan proceeds
      • Loan forgiveness amount
    • Lenders are required to perform a “good faith review in reasonable time” of:
      • Confirm receipt of required documentation
      • Confirm specific borrower calculations on Forgiveness Application
        • “minimal review of payroll reports by a recognized payroll processor” are allowed but “extensive review of calculations and data” would be required if not coming from a “recognized source”
      • Lenders are not entitled to lender fees if borrower is determined ineligible for a PPP loan (1 year clawback period)

Update May 20, 2020

SBA releases PPP Loan Forgiveness Application and Instructions. AICPA and members of Congress urge changes to forgiveness rules.

Updated May 14, 2020

Interim Final Rule (IFR) allows partnerships and seasonal employers to increase their existing loans if loan amounts were determined under prior guidance and existing guidance will allow a higher loan amount. Existing guidance allows partnerships to include 2019 SE income of partners as a “payroll cost”. Guidance released April 28th established an alternate method to determine PPP loan amounts for seasonal employers. Requests from borrowers under this IFR are subject to strict time limits so should be made immediately.

Updated May 13, 2020

The SBA announced a safe harbor applicable to borrowers receiving loans less than $2 million. The borrower will be deemed to have made the required certification of “need for the loan” in good faith.

  • For borrowers receiving loans in excess of $2 million, the SBA will “review” their loans. If, based on the review, it is determined that the borrower lacked an adequate basis for the required certification, the SBA will seek repayment of the loan and notify the lender that no forgiveness shall be granted. If the borrower then repays the loan, the SBA will not pursue any enforcement actions.
  • #46: Treasury FAQ
  • Additional info: SBA Releases Additional Guidance Regarding Certification of “Need” for PPP Loan

Updated May 6, 2020

Legislation introduced in the Senate on Tuesday, 5/5 would overrule an IRS notice and clarify that ordinary expenses funded by PPP loans are deductible by taxpayers. The bill, the Small Business Expenses Protection Act of 2020, S. 3612, is currently in the Senate Finance Committee. Treasury Secretary Mnuchin is supporting the IRS’ position.

For purposes of the PPP’s 500-or-fewer-employee size standard, an applicant must count all its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the SBA’s affiliation rules.

Treasury issued updated FAQ (#45) clarifies that employers who repay their PPP loans by the safe harbor deadline (May 18, 2020) will be eligible for the Employee Retention Credit:

The SBA has concluded that PPP Loans issued to nonprofits do not represent federal financial assistance. Therefore, these loans will not be subject to Single Audit requirements. However, loans issued under the EIDL program will be considered as federal financial assistance and are required on the SEFA.

Updated May 5, 2020

Treasury Department released updated FAQ (#43): SBA guidance and regulations provide that any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith. The SBA is extending the repayment date for this safe harbor to May 18, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor.

Updated May 4, 2020

The SBA Issued PPP Guidance on Laid-Off Employees Who Refuse to be Rehired – Businesses that received PPP loans can exclude laid-off employees from loan forgiveness reduction calculations if the employees turn down a written offer to be rehired.

Updated May 2, 2020

SBA Announces Retro-Active Change to Paycheck Protection Loan Program

Updated April 30, 2020

IRS announced that expenses paid with PPP loan proceeds that are forgiven cannot be deducted: Notice 2020-32

Employee Retention Credit – additional guidance concerning eligibility and interaction with the PPP Loan. Taxpayers not receiving a PPP Loan may be able to qualify for this refundable credit to offset their payroll costs.

Updated April 29, 2020

Treasury department clarifies that a business in operation on Feb. 15, 2020, but had a change in ownership after that date, can qualify for a PPP loan:

Updated April 28, 2020

Treasury Secretary Steven Mnuchin announced the federal government plans to audit any company taking out more than $2 million from the small business loan program.

Treasury Department releases updated FAQ indicating that private companies with adequate sources of liquidity to support the business’s ongoing operations will likely NOT qualify for a PPP loan.

Updated April 27, 2020

The SBA began taking applications for the second round of funding for the Paycheck Protection Program.

The SBA released a new interim final rule for the PPP program:

  1. Confirming that VC backed entities will apply the regular affiliation rules (no special exceptions);
  2. ESOPs will not impact PPP eligibility; and
  3. Borrowers should make sure that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”

The SBA released new FAQ detailing how various entity types (Nonprofits, C and S-Corps, Partnerships, LLC’s, Sole Proprietorships) can calculate loan amounts for the PPP program:

Updated April 13, 2020

All employers can defer the employer portion of social security tax (6.20%) deposits due between March 27th and Dec 31st until Dec 2021 and 2022. The IRS clarified on April 13th that if the employer receives a PPP Loan, the tax that can be deferred stops only at the time the loan is forgiven by the lender. Employers should contact their payroll service if they wish to take advantage of this cash saving opportunity.

FinTech companies have been approved to offer PPP loans including, Square, QuickBooks, Paypal: Forbes – Banks And Fintech Companies Accepting PPP Loan Applications From New And Non-Bank Customers

Treasury department issues FAQ to clarify many issues:

  • The twelve-month period to determine “Payroll Costs” can be either calendar year 2019 or the twelve months prior to obtaining the loan
  • Payments made to independent contractors do not qualify as “Payroll Costs”
  • “Payroll Costs” to calculate the maximum loan amount and the amount of loan forgiveness should be calculated based on gross payroll, not net (after employee deductions) payroll.
  • The per-employee compensation cap of $100,000 does not include benefits
  • Employer’s share of Social Security and Medicare tax are not included in “Payroll Costs”
  • Borrowers who have submitted applications that have not yet been processed can revise their applications based on clarifications included in the FAQ.

On April 14th the Small Business Administration released guidance for borrowers with self-employment income. This includes sole proprietors (with and without employees), independent contractors, gig workers, and partners or limited liability company members with self-employment income reported on their Schedule K-1’s.

Loan Amount

  • The loan amount is based on the taxpayer’s “payroll costs” as discussed in our previous blog, COVID-19 Paycheck Protection Program and Forgivable Loans Summary. For self-employed taxpayers, their “payroll costs” would be equal to the net income reported on their 2019 Form Schedule C (Line 31) subject to a maximum of $100,000.
    • A Schedule C showing 2019 income and expenses must be included with the borrower’s application regardless if the borrower has actually filed their 2019 tax returns or not.
  • If taxpayers have employees, their total “payroll cost” would include the “payroll cost” for these employees.
  • Payroll cost of the self-employed taxpayer does not include the cost of their health insurance or retirement plan contributions. These amounts are included in “payroll cost” for employees.
  • An EIDL loan made between Jan 31 and April 3, 2020 can be refinanced: Economic Injury Disaster Loan

Loan Forgiveness

All or a portion of the loan will be forgiven if used for qualified expenses during the 8-week period after loan funds are disbursed. These expenses include:

  • “Payroll cost” for employees, if any
  • Owner compensation limited to 8/52 of the lessor of 2019 Schedule C net income or $100,000
    • At least 75% of the loan proceeds need to be used for employee or owner “payroll costs”
  • Mortgage interest payments**
  • Rental payments**
  • Utility payments**
  • Interest payments on debt incurred before Feb 20, 2020 (loan funds can be used for this purpose but will not result in loan forgiveness)

** Taxpayers must have deducted (or been entitled to deduct) these expenses on their 2019 Schedule C. If these expenses were not incurred in 2019, they are not a qualified expense.

Documents Required With Loan Application

Each lender can determine the documents that will be needed but the SBA is requiring the following:

  • Schedule C for 2019
  • Forms 1099-MISC received for tax year 2019
  • Evidence of self-employment such as invoices, bank statements, accounting records
  • Evidence to show taxpayer was in operation on Feb 15, 2020, such as invoices, bank statements, payroll reports, or accounting records
  • Payroll records if taxpayer had employees in 2019
  • Evidence of 2019 retirement plan and health insurance payments for employees 

Partners with Self-Employment Income

Partners or LLC members may not apply for a PPP loan based upon their self-employment income. Instead, the self-employment income reported on their 2019 Schedule K-1 (maximum of $100,000) can be included as a “payroll cost” on the application filed for their partnership or LLC. It is presently unclear how to correct previously approved loan applications filed by partnerships and LLCs that did not include this self-employment income as a “payroll cost”.

If you have any questions, please reach out to our COVID-19 Resource Team here at ASL and we’d be happy to help:

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