Paycheck Protection Program Loans for Taxpayers with Self-Employment Income

New Developments – May 2021

The FTB has stated that they will not be creating any new forms or certifications for taxpayers to demonstrate that they meet the 25% drop in gross receipts test for purposes of deducting expenses paid with forgiven PPP debt. They will be updating form instructions, though we do not know when to expect those updates.

The SBA has stopped accepting new PPP applications from most lenders as general funds run out. The only remaining funds available for new applications are $8 billion set aside for community financial institutions (CFIs), which typically work with businesses in underserved communities. The agency also has set aside $6 billion for PPP applications still in review status or needing more information due to error codes.

New Developments – April 2021

Gov. Newsom signed AB 80 on April 29, 2021. AB 80 generally conforms to the federal treatment of PPP loan forgiveness and EIDL grants, with one major exception:

  • To deduct expenses paid with PPP loan forgiven amounts, the taxpayer must have a 25% reduction in gross receipts in any 2020 calendar quarter as compared to the comparable 2019 calendar quarter. If the taxpayer does not meet this threshold reduction, the expenses cannot be deducted on the California return.
  • 2021-32: California’s partial PPP conformity bill sent to Governor

Expenses paid with 2020 PPP loans can be deducted on 2021 tax returns–The IRS announced a limited safe harbor for certain businesses that received first-round Paycheck Protection Program (PPP) loans but did not deduct any of the eligible expenses because they relied on (previously) current IRS guidance.  This safe harbor is available only for taxpayers that filed their 2020 federal tax returns prior to Dec 27, 2020.

When accounting for Paycheck Protection Program (PPP) loans, for-profit entities may wish to apply the conditional contribution method that has been more commonly associated with not-for-profits’ PPP accounting:

The US Treasury has released guidance, allowing states to enact tax reduction legislation conforming to federal tax provisions and not violate the provisions of the American Rescue Plan Act. This will allow the CA legislature to once again work on PPP conformity.

New Developments – March 2021

President Biden signed H.R. 1799, the PPP Extension Act of 2021. The Act extends the application deadline for both first and second draw PPP loans from March 31 to May 31, 2021. The PPP Extension Act does not provide any additional funding for the current round of the PPP.

  • Patrick Kelley, associate administrator for the SBA’s Office of Capital Access, said that at the current lending rate, the PPP should have enough funding to last through mid-April.
  • Biden signs PPP deadline extension into law

How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – by Business Type Updated March 12, 2021

Second Draw PPP Loans – How to Calculate Revenue Reduction and Maximum Loan Amounts Including What Documentation to Provide Updated March 12, 2021

New Developments – February 2021

Governor Newsom signed two bills on February 23, that will provide cash grants to qualified small businesses impacted by COVID-19 and cash (stimulus) payments to lower-income families. The Legislature is still negotiating a PPP/EIDL conformity bill that would allow businesses to deduct expenses paid with these loans/grants. It is hoped that this bill will be passed by the end of this week.

President Biden February 22, announced a series of changes to the Paycheck Protection Program designed to make the program more accessible to underserved borrowers. The changes:

  • Starting Wednesday, February 24, for a two week period only, businesses with fewer than 20 employees can apply for loans
  • The way loans are calculated will be revised so businesses without employees get more relief. Details to be announced later.
  • Set aside $1 billion in PPP loan funds for businesses without employees in low- and moderate-income areas.
  • The elimination of an exclusion that prevents business owners with non-fraud felony convictions from accessing the program.
  • The elimination of an exclusion that prevents business owners who are delinquent on federal students loans from accessing the program.
  • Non-citizen small-business owners who are lawful U.S. residents will be able to apply for loans using individual taxpayer identification numbers.
  • The SBA reported Monday that it approved more than 1.9 million PPP loans for a total of $40 billion from Jan. 11 through Feb. 21. The application window for the current, $284 billion iteration of PPP is scheduled to close March 31.
  • FACT SHEET: Biden-Harris Administration Increases Lending to Small Businesses in Need, Announces Changes to PPP to Further Promote Equitable Access to Relief

New Developments – January 2021

PPP Application Update—Second draw borrowers need to experience a 25% decline in gross receipts for one quarter of 2020 vs the same quarter of 2019. The gross receipts test should include the gross receipts of any affiliated entities.

The SBA announced that it is taking steps to improve the agency’s first-draw PPP loan review process so that small businesses seeking a second-draw loan have as much time as possible to access those funds. If clients are applying for a second PPP loan they should consider submitting their Forgiveness Application for the First Draw after the Second Draw is approved.

The SBA and Treasury published updated Paycheck Protection Program loan forgiveness guidance and forms, including a one-page application for borrowers that received a PPP loan of $150,000 or less.

The SBA and Treasury released two other PPP loan forgiveness applications:

  • Form 3508
  • Form 3508EZ
  • Borrowers must submit payroll and nonpayroll documentation when applying for loan forgiveness with those forms, which provide lists of the required documents.

In addition, the SBA and Treasury released Form 3508D, which certain individuals must use to disclose controlling interest in an entity applying for a PPP loans.

The SBA and Treasury issued an 18-page document detailing how Paycheck Protection Program borrowers should calculate revenue reduction and maximum loan amounts for second-draw PPP loans.

In addition, the SBA and Treasury issued three pieces of guidance over the weekend (January 16 – 17, 2021):

The application window for the Paycheck Protection Program opened Friday, January 15, 2021, for lenders with $1 billion or less in assets (for both first- and second-draw PPP loans).

The SBA has announced that the Paycheck Protection Program will reopen the week of January 11 (The closing date for the new PPP is March 31). The following new PPP funds will be available to borrowers:

  • New “second draw PPP loans” for businesses with fewer than 300 employees and have experienced a 25% decline in gross receipts in any quarter of 2020 vs 2019. (Top-line Overview of Second Draw PPP 1/8/2021)
  • Supplemental funding for original PPP loans where the loan amount would have changed due to new rules that have been released; or businesses that did not originally apply for first draw PPP loans. (Top-line Overview of First Draw PPP 1/8/2021)
  • Only community financial institutions (Community Development Financial Institutions, minority deposit institutions, certified development companies, microloan intermediaries) will be able to submit first draw PPP loan applications to the SBA on Monday, January 11, and second draw PPP loan applications on Wednesday, January 13. The PPP program will then open to all other participating lenders “shortly thereafter”.
  • It is uncertain how many “community financial institutions” will be participating as PPP lenders.
  • Anticipated new application forms have not yet been released by the SBA.

The SBA and Treasury issued guidance late Wednesday night for the reconstituted Paycheck Protection Program. The guidance came in the form of two interim final rules:

Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns:

The Treasury Department and IRS issued Revenue Ruling 2021-2 January 5, 2021, withdrawing previous guidance and conforming to the deduction of expenses paid with forgiven PPP loans authorized by the CAA of 2021.

  • Guidance: Rev. Rul. 2021-2
  • NOTE: California has not conformed to CAA so expenses continue to be non-deductible.

New Developments – December 2020

The COVID-Related Tax Relief Act of 2020 signed by President Trump on Sunday, December 27, 2020, offers many opportunities for borrowers. More implementation guidance is expected from both the SBA and Treasury Department regarding unanswered questions and issues that will develop as the program is implemented but for now, borrowers should consider how they may benefit from these provisions.

PPP update – In response to a recent court order, the SBA publicly released the names, addresses, exact amounts borrowed, and lenders for all recipients of PPP loans, EIDL loans, and EIDL grants. Previously, loan information for borrowers with loans under $150K had not been disclosed. For other PPP borrowers, the exact loan amounts had not previously been disclosed.

New Developments – October 2020

FAQs on PPP Loan Forgiveness Updated October 13, 2020: The PPP loan forgiveness application forms (3508, 3508EZ, and 3508S) display an expiration date of 10/31/2020 in the upper-right corner, but this does not mean October 31, 2020 is the deadline for borrowers to apply for forgiveness. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, loan payments are no longer deferred and the borrower must begin making payments on the loan. Note—these loan terms apply even if the original note signed by the borrower contain different terms that were applicable when the note was signed.

The SBA issued a new PPP Forgiveness Application Form 3508S and 3508S Instructions for those small businesses that secured a PPP loan of $50,000 or less. The most significant benefit of the new form is that employee reductions and salary reductions are no longer penalized. Additionally, the new form does not require submitting mathematical calculations on how the funds were spent, but it still requires the borrower to submit to the lender evidence (bank statements, invoices, etc) that the funds were properly spent. Interestingly, the SBA also reduced the lender’s responsibility to “verify” the evidence submitted.

  • Because the maximum PPP loan amount is $50,000, this new loan forgiveness application will be most beneficial to self-employed,  gig workers and businesses with just a few employees. There are approximately 3.57 million outstanding PPP loans of $50,000 or less, totaling approximately $62 billion of the $525 billion in PPP loans.
  • There is still a possibility that the SBA/Congress may authorize a streamline forgiveness process for loans over $50K and under $150K.
  • SBA just recently began approving PPP forgiveness applications and remitting forgiveness amounts to lenders last week on October 2, 2020.
  • New PPP Loan Forgiveness Application Form 3508S
  • New PPP Loan Forgiveness INSTRUCTIONS for Form 3508S​​​​​
  • New IFR for Loan Forgiveness of Small Loans

New Developments – August 2020

Lenders should account for the forgivable portion of a Paycheck Protection Program (PPP) loan as an interest-bearing loan until the receipt of payment for that loan from the SBA, according to a Technical Question and Answer posted by the AICPA.

PPP Loans: Treasury Department released new IFR on Aug. 24 addressing related party issues:

  • Owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule
  • The amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses
    • Example: A borrower rents an office building for $10,000 per month and subleases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
    • Example: A borrower works out of their home. When determining the amount of nonpayroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings
  • Rent payments to a related party are eligible for loan forgiveness as long as:
    • the amount of loan forgiveness requested for rent /lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and 
    • the lease/mortgage were entered into prior to February 15, 2020
  • Mortgage interest payments to a related party are not eligible for forgiveness
  • IFR – Business Loan Program Temporary Changes; Paycheck Protection Program – Treatment of Owners and Forgiveness of Certain Nonpayroll Cost
  • Journal of Accountancy – New PPP forgiveness guidance addresses owner-employee compensation, rent-related costs

The SBA PPP Forgiveness Platform went live on August 10 to begin accepting Lender submissions. Major banks are delaying accepting applications from their borrowers.

Treasury Department released new FAQ’s for PPP Loan Forgiveness (Updated Aug. 4) confirming existing guidance and addressing a few open issues, including the meaning of “transportation utility expenses.”

New Developments – June 2020

Treasury and SBA guidance on How to Calculate Maximum Loan Amounts by Business Type was updated on June 26:

  • FAQ No. 10 applies to self-employed individuals whose businesses were in operation on Feb. 15, 2020, but were not in operation from Feb. 15, 2019, to June 30, 2019, and will file a Form 1040 Schedule C or Schedule F for 2020.
  • The maximum PPP loan amount in this case would generally be equal to 2.5 times the business’s average monthly payroll costs incurred in January and February 2020, plus the outstanding amount of any Economic Injury Disaster Loan (EIDL) received between Jan. 31, 2020, and April 3, 2020 that will be refinanced by the PPP loan, less any EIDL Advance received.
  • Questions 1, 2, 4, 5, 6, and 7 were updated to reflect the 24-week covered period that was established with the PPP Flexibility Act
  • How to Calculate Maximum Loan Amounts by Business Type FAQ

The SBA and the Treasury Department unveiled a simpler loan forgiveness application for the Paycheck Protection Program to reflect changes in the PPP Forgiveness Act. The new EZ application requires fewer calculations to be done and less documentation is needed for eligible borrowers. The application is for borrowers who:

Revised PPP Loan Forgiveness Application and Instructions as of June 16. Highlights of the changes:

  • Health insurance costs for S corporation owners cannot be included when calculating payroll costs; however, retirement costs for S corporation owners are eligible costs.
  • Safe harbors for excluding salary and hourly wage reductions and reductions in the number of employees (full-time equivalents) from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. Borrowers don’t have to wait until Dec. 31 to apply for forgiveness to use the safe harbors. (Future guidance may clarify this new safe harbor)
  • Borrowers that received loans before June 5 can choose between using the original eight-week covered period or the new 24-week covered period.
  • PPP Loan Forgiveness Application Revised June 16, 2020
  • PPP Loan Forgiveness Application Instructions for Borrowers Revised June 16, 2020

The SBA filed its 19th IFR, scheduled to be published on Friday, June 19, focusing on revisions made from PPP Flexibility Act, ensuring full forgiveness for self-employed, freelancers and independent contractors who took the maximum loan amount based on 2.5 times their 2019 monthly income.

  • The IFR shows us how to calculate owner compensation under the new rules. The cap applies to self-employed and general partners and appears to apply to C and S Corp owners as well. It’s either:
    • Eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period
    • 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period
  • The 24-week extension also increased the amount eligible for forgiveness for (non-owner) employee compensation. The payroll costs including salary, wages, and tips are still capped at $100,000 of annualized pay. But now, instead of $100,000/52 * 8 (a max of $15,385 per individual), you get up to $100,000/52 *24, making the new maximum forgiveness cap $46,154 per individual for 24 weeks.
  • Journal of Accountancy – New PPP Loan Forgiveness Applications Released

New Developments – May 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)

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.

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

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.

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.

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.

SBA Announces Retro-Active Change to Paycheck Protection Loan Program

New Developments – April 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.

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:

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.

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:

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 annually.
    • 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

The SBA released new FAQ detailing how various entity types can calculate loan amounts for the PPP program:

Loan Forgiveness

All or a portion of the loan will be forgiven if used for qualified expenses during the 24-week (optional 8-week period available if loan funded prior to June 5, 2020) “Covered Period” (beginning upon receipt of loan proceeds) for:

  • “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.

SBA has clarified that both expenses paid during the “Covered Period” and expenses incurred but paid in the next payment cycle after the “Covered Period” has ended are eligible for forgiveness.

Borrowers have 10 months after the end of the Covered Period to submit their applications for forgiveness.

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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