Yes, if you meet the following requirements: (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 have or will file a 2019 Form 1040, Schedule C. The SBA states it will issue additional guidance for individuals with self-employment income who were not in operation in 2019, but were in operation on February 15, 2020, and will file a 2020 Form 1040 Schedule C.
Paycheck Protection Program (PPP) Loan FAQs
By: Dean Dorton | April 10, 2020
Question? Contact Us
COVID-19 | COVID-19 SBA Loan Programs | Tax
Looking for answers about PPP Loans? We have answers!
This information was last updated on Monday April 13, 2020 at 11:30 a.m. We will update this page with changes and update the timestamp accordingly.
The SBA continues to issue guidance on loans made through the Paycheck Protection Program (PPLs). In our previous posts we provided the Information Sheet and Revised Application Form issued late April 2, 2020. Subsequently, guidance issued through April 10, 2020, included the First PPP Interim Final Rule posted on April 2, 2020, a Fact Sheet about Affiliation Rules, Frequently Asked Questions for Faith-Based Organizations, and a series of FAQs The Department of Treasury and the SBA are updating several times a week. The most recent FAQs are as of April 15, 2020.
We have updated and supplemented the FAQs previously posted to reflect the most recent guidance, including the Third PPP Interim Final Rule issued April 14, 2020, which addresses “Additional Eligibility Criteria and Requirements for Certain Pledges of Loans”. We will refer to the April 14, 2020 Third PPP Interim Final Rule as “Third IFR” or “IFR.”
The answers below may change based on future guidance issued by the SBA or Department of Treasury and changes made by Congress and signed into law by the President. We continue to recommend you also consult with your lender on specific questions.
Highlights of the Third IFR on Additional Eligibility
If the individual has no employees, the calculation is as follows:
Step 1: Find line 31, net profit amount, on the 2019 Schedule C. If you have not yet filed a 2019 return, fill out 2019 Schedule C and calculate the amount for line 31. Reduce any amount over $100,000 to $100,000. If this amount is zero or less, you are not eligible for a PPL.
Step 2: Divide the amount from Step 1 by 12 to determine the average monthly net profit amount.
Step 3: Multiply the 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.
Regardless of whether a 2019 tax return has been filed, an applicant must provide the 2019 Schedule C. and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes self-employment. The applicant also must provide a 2020 invoice, bank statement, or other record to establish that the individual was in operation on or around February 15, 2020.
If the individual has employees, the calculation is as follows:
Step 1 – Compute payroll costs by adding (a), (b), and (c):
- Find line 31, net profit amount, on the 2019 Schedule C. If you have not yet filed a 2019 return, fill out 2019 Schedule C and calculate the amount for line 31. Reduce any amount over $100,000 to $100,000, and, if this amount is zero or less, set the amount to zero;
- 2019 gross wages and tips paid to 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 in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States;
- 2019 employer 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 – Divide the amount from Step 1 by 12 to determine the average monthly payroll costs.
Step 3 – Multiply the 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.
The applicant must supply its 2019 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 the applicant was in operation on February 15, 2020.
The proceeds are to be used for (i) owner compensation replacement; (ii) employee payroll costs; (iii) mortgage interest payments on any business mortgage obligation on real or personal property; business rent payments; and business utility payments (these amounts must be expenses on the 2019 Form 1040 Schedule C for them to be a permissible use); (iv) interest payments on other debt obligations that were incurred before February 15, 2020 (however, these amounts are not eligible for loan forgiveness); and (v) refinancing an SBA Economic Injury Disaster Loan. Additionally, 75% of the loan proceeds must be used for payroll costs.
The actual amount of forgiveness will depend on the total amount spent over the covered period, i.e., the eight weeks from the date of the funding of the loan, 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 unemployment insurance;
- owner compensation replacement, calculated based on 2019 net profit 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 section 7004 of FFCRA; and
iii. interest paid on business mortgages on real or personal property, rent payments on lease agreements, and utility payments, if the obligation for the payments were incurred before February 15, 2020, and to the extent they are deductible on Form 1040 Schedule C.
Seventy-five percent (75%) of the amount forgiven must be attributable to payroll costs.
The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application; 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); and 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 answers to the next four questions have been revised based on the Third IFR.
No. The self-employment income of general active partners is reported as a payroll cost, up to $100,0000 annualized, on a PPP loan application filed by the partnership.
The SBA makes a distinction between self-employed individuals that file a Form 1040 Schedule C and self-employed individuals that receive a Form 1065 Schedule K-1. Schedule C filers are to apply for their own loan, whereas K-1 recipients file as part of the partnership or limited liability entity in which they are active.
Payroll costs include allocable self-employment income of each of a partnership’s active partners (or members of a limited liability company taxed as a partnership) up to $100,000 annualized. The allocable self-employment income of a partner or member is reported on line 14a of Form K-1 and generally includes guaranteed payments and the partner’s or member’s distributive share of the current year’s net income or loss of the partnership.
State unemployment insurance premiums may be included in payroll costs.
For each of the three purposes listed in the question, payroll costs are calculated on a gross basis without subtractions or additions based on federal taxes imposed or withheld. That is, payroll costs are not reduced by federal taxes imposed on an employee and required to be withheld by the employer. Additionally, payroll costs do not include the employer’s share of FICA (Federal Insurance Contributions Act).
The eight-week period begins on the date the lender makes the first disbursement of the loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
Additionally, a business can qualify for the Paycheck Protection Program as a small business concern if it meets the SBA’s “alternative size standard” as of March 27, 2020: maximum tangible net worth of the business is not more than $15 million, and the average net income after Federal income taxes (excluding any carry-over losses) of the company for the two full fiscal years before the date of the application is not more than $5 million.
A non-profit business is eligible for a loan if the business has 500 or fewer employees whose principal place of residence is in the United States, and is a qualifying tax-exempt non-profit organization described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, or a Tribal business described in section 31(b)(2)(C) of the Small Business Act.
The allowable uses of the loan proceeds are payroll costs, mortgage interest payments, rent, utilities, and interest on other indebtedness incurred prior to February 15, 2020. However, interest on other indebtedness does not qualify for forgiveness, and to qualify for the maximum amount of forgiveness non-payroll costs are limited to 25% of total forgivable costs.
No. Payments to independent contractors are not included in the borrower’s calculation of payroll costs. The CARES Act permits independent contractors, sole proprietors, and self-employed individuals to file their own loan applications.
Yes. Businesses may obtain both a PPL and an EIDL. EIDL’s made between January 31, 2020, and April 3, 2020 will be rolled into the loan amount of PPLs.
Count all individuals employed on a full-time, part-time, or another basis. “Employees” includes employees obtained from a temporary employee agency, professional employee organization, or leasing concern. The average number of employees of the business is based upon the number of employees for each pay period for the preceding completed 12 calendar months. Part-time and temporary employees are counted the same as full-time employees. If a company has not been in business for 12 months, use the average number of employees for each pay period during which it has been in business.
The average number of employees of a business with affiliates is calculated by adding the average number of employees of the business and the average number of employees of each affiliate. However, affiliation rules are waived for small businesses (1) in the hotel and food services industries (NAICS code beginning with 72); (2) that are franchises in the SBA’s Franchise Directory; or (3) that receive financial assistance from small business investment companies licensed by SBA. Additional information on the treatment of businesses in the hotel and food services industries and franchises was added to the SBA’s FAQs on April 13, 2020. See FAQs 23 and 24. (7)
Businesses and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists. The SBA considers factors such as ownership, management, previous relationships with or ties to another business, and contractual relationships in determining whether affiliation exists. Affiliation may be found where an individual, business, or entity exercises control indirectly through a third party.
In general, borrowers can calculate their average monthly payroll costs using data either from the previous 12 months or from calendar year 2019.
Seasonal businesses may use average monthly payroll for the period between February 15, 2019 or March 1, 2019 and June 30, 2019.
An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.
Payroll costs are defined to include: salary, wage, commission, or similar compensation (capped at $100,000 on an annualized basis for each employee); payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care and retirement benefits, including insurance premiums; and payment of state or local tax assessed on the compensation of employees.
Payroll costs exclude the employer’s share of FICA; any compensation of an employee whose principal place of residence is outside the US; and qualified sick or family leave wages for which a credit is allowed under the Emergency Sick Leave Act (Section 7001) or Emergency Family Leave Act (Section 7003) that are part of the Families First Coronavirus Response Act (FFCRA).
No. The exclusion of compensation over $100,000 annually applies only to cash compensation, not to non-cash benefits, including employer contributions to defined-benefit or defined-contribution retirement plans; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and payment of state and local taxes assessed on compensation of employees.
Yes. The allowable amount of the loan includes costs for employee vacation, parental, family, medical, and sick leave. However, the CARES Act excludes from payroll costs qualified sick and family leave wages for which a credit is allowed under Sections 7001 and 7003 of the FFCRA.
Yes. The SBA recognizes that eligible borrowers that use PEOs or similar payroll providers are required under some state registration laws to report wages and other data on the EIN of the PEO or other payroll providers. In these cases, payroll documentation provided by the payroll provider that indicates the amount of wages and payroll taxes reported to the IRS for the borrower’s employees will be considered acceptable payroll documentation.
Documentation such as payroll processor records, payroll tax filings, Form 1099-MISC, or income and expenses from a sole proprietorship may be required from an applicant. For applicants that do not have any such documentation, the borrower must provide other supporting documentation, such as bank records, sufficient to demonstrate the qualifying payroll amount.
Loan funds used for unauthorized purposes must be repaid. Knowingly using the funds for unauthorized purposes will subject a borrower to additional liability, such as charges for fraud. If shareholders, members, or partners use PPL funds for unauthorized purposes; the SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
The applicant must certify in good faith to all of the below:
- The applicant was in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes.
- Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments;
- Knowingly using funds for unauthorized purposes may result in legal liability for fraud.
- Not more than 25 percent of loan proceeds may be used for non-payroll costs.
- Documentation verifying the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the eight week period following this loan will be provided to the lender.
- Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. As explained above, not more than 25 percent of the forgiven amount may be for non-payroll costs.
- During the period beginning on February 15, 2020, and ending on December 31, 2020, the applicant has not and will not receive another loan under this program.
- The information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects.
- Knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including by imprisonment and/or a fine.
- Tax documents submitted with the loan application are identical to those provided to the Internal Revenue Service.
You apply through a participating bank.
The answer to this is unclear.
The answer to this is unclear.
Just the amount over $100,000.
The answer to this is unclear, but there does not appear to be an express prohibition of such payment.
An application should be filed for each business with a FEIN.
Ultimately, your lender will determine the amount of forgiveness based on the rules of the program. However, to ensure maximum forgiveness it is important that:
(i) at least 75% of loan proceeds be used for payroll costs;
(ii) the loan proceeds be exhausted within eight weeks following disbursement of the loan proceeds;
(iii) documentation be maintained for all uses of the loan proceeds.
Electricity, gas, water, transportation, and phone or internet for which services began before February 15, 2020.
The interest rate is 1.0%.
The term is two years.
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