The Small Business Administration, in consultation with the Department of the Treasury, addressed questions many self-employed individuals have raised regarding their eligibility for PPP loans in guidance released on April 14. While this article only addresses guidance for self-employed individuals seeking PPP loan funds, you can visit here: https://www.wallerlaw.com/news-insights/3543/How-to-apply-for-an-SBA-Paycheck-Protection-Program-loan for a full summary of the PPP loan program.

While the SBA has currently exhausted its funding for the PPP program, this analysis is still pertinent to all past and future applications.

Eligibility

The newly-released SBA guidance states individual are eligible to receive a PPP loan as a self-employed individual as long as the individual meets the following requirements:

  • 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.

The guidance also makes clear that individual partners of a partnership should not apply individually for a PPP loan if the partnership has already applied. Partnerships can apply for up to $100,000 annualized payroll costs for its partners. Further, the SBA is urging partnerships to apply at the partnership level because individual partnership applications would give rise to confusion regarding allocation of payroll, rent, mortgage and debt service costs borne by each individual partner.

Calculating Loan Amount

The guidance also sets forth the maximum amount a self-employed individual may borrow and the documentation needed to submit with the loan application. There are two methodologies for calculating the maximum loan amount, depending on whether the self-employed individual has employees or not. 

If an individual has no employees, they should divide their net profit amount from 2019 (1040 Schedule C line 31) by 12 to calculate monthly net profit. Multiply the monthly net profit figure by 2.5, and add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that will be refinanced, less the amount of any advance under an EIDL loan.

If an individual has employees, the calculation is the same, except the individual must add their net profit amount with 2019 gross wages and tips paid to employees plus any pre-tax employee contributions for health insurance or other fringe benefits, and subtract any amounts paid to any individual employee in excess of $100,000 annualized.

As part of the application, individuals must provide their 2019 Form 1040 Schedule C, a 2019 IRS Form 1099-MISC detailing nonemployee compensation received, and an invoice, bank statement, or book of record that they were in operation on or around February 15, 2020. Self-employed individuals with employees must also include payroll processor records, state quarterly wage unemployment insurance tax reporting forms, along with evidence of any retirement and health insurance contributions, if applicable.

Use of Proceeds

The proceeds of PPP loans for self-employed individuals may be used for owner compensation replacement, employee payroll costs, interest payments on other debt obligations, refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020, as well as for certain business overhead costs. These business overhead costs include mortgage interest payments on any business mortgage obligation on real or personal property, business rent payments, and business utility payments. You must have claimed or be entitled to claim a deduction for such expenses on 2019 Form 1040 Schedule C for these overhead costs to be a permissible use during the eight-week period following the first disbursement of the loan. This requirement ensures that the PPP loan is necessary to “support the ongoing operations” of the borrower as required by the CARES Act.

These use of proceeds rules are still subject to the mandate that at least 75% of PPP loan proceeds shall be used for payroll costs. However, there is no clear indication if payroll costs in this sense includes owner compensation replacement, which may lead to some further clarification for loan forgiveness purposes.

Loan Forgiveness

PPP loans for self-employed individuals may be forgiven up to full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spend over the covered period on (i) payroll costs, (ii) owner compensation replacement, limited to eight weeks’ worth of 2019 net profit, and (iii) those overhead costs mentioned above to the extent they are deductible on Form 1040 Schedule C.

In addition to the borrower certification required by Section 1106(e)(3) of the 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.

Other Clarifications

The SBA guidance also clarified questions related to directors/shareholders of PPP lenders obtaining individual PPP loans as well as gaming institutions eligibility for PPP loans.

Eligible businesses owned by directors or shareholders of a PPP lender are permitted to apply for a PPP loan through that same lender. 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. However, 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.

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: (a) the business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019; and (b) legal gaming revenue (net of payouts but not other expenses) comprised less than 50 percent of the business’s total revenue in 2019.

Finally, the SBA will issue additional guidance for those individuals with self-employment income who were not in operation in 2019 but who were in operation on February 15, 2020 at a later date.