SBA Issues Second Interim Final Rule for Sole Proprietors and Independent Contractors
Apr 15, 2020
The SBA issued a Second Interim Final Rule yesterday, April 14, 2020, under the Paycheck Protection Program (PPP). The ruling covers mainly Independent Contractors (ICs), Sole-Proprietors (SPs) and Partnerships.
Here are two quick takeaways:
- IPs and SPs will need to attach completed 2019 Schedule Cs to their PPP loan applications.
- Partners in partnerships cannot apply for PPP loans. The partnership applies and includes the partners.
a. Includes self-employment income (SEI) of general active partners up to $100K annualized.
b. Presumably includes SEI relating to guaranteed payments and to active members in LLCs.
ICs and SPs are eligible if:
- They were in operation on February 15, 2020;
- They had self-employment income;
- Their principal place of residence is in the US; and
- They filed or will file a Form 1040, Schedule C.
Maximum loan amount for ICs/SPs with no employees:
(If they have employees, follow the below for the owner and add the normal calculation of employee wages to $100,000 plus health insurance, retirement benefits and state taxes on wages.)
- Start with schedule C for 2019 – if it isn’t done yet, finish it. It is required to be submitted with the loan application.
- Cap net profit at $100,000, divide by 12, and then multiple by 2.5.
- Add any outstanding EIDL loans made between January 31, 2020, and April 3, 2020, and subtract any grant received.
- Do not include health benefits, retirement benefits or state and local taxes on income.
You will need to attach Forms 1099-MISC detailing non-employee compensation (box 7), invoices, bank statements, or books of record that establish self-employment in 2019 and on February 15, 2020.
Allowable uses of loan proceeds:
- Owner compensation replacement, calculated based on 2019 net profit (max $15,385 over eight weeks, which is $100,000 annualized).
- Employee payroll costs (as defined in the First Interim Final Rule) for employees whose principal place of residence is in the U.S., if you have employees.
- Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business).
- Business rent payments (e.g., the warehouse where you store business equipment or the vehicle you use to perform your business) and business utility payments (e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle).
- Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).
- Refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020, (maturity will be reset to PPP’s maturity of two years):
a. If you received an SBA EIDL loan from January 31, 2020, through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan.
b. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
You must have claimed or be entitled to claim a deduction for all such expenses on your 2019 Form 1040, Schedule C for them to constitute a permissible use during the eight-week covered period. For example, if you did not claim or are not entitled to claim utility expenses on your 2019 Form 1040, Schedule C, then you cannot use the proceeds for utilities during the eight-week covered period.
Amount eligible for forgiveness:
The amount eligible for forgiveness includes the full principal amount of the loan plus accrued interest.
The actual amount will depend, in part, on the total amount spent over the covered period 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), covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums);
- Owner compensation replacement, calculated based on 2019 net profit, with forgiveness of such amounts limited to 8 weeks 2019 net profit (8/52), but excluding any qualified sick/family for which a payroll tax credit was claimed under FFCRA;
- 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 (business mortgage payments);
- Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040, Schedule C (business rent payments); and
- Utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040, Schedule C (business utility payments).
In addition to the borrower certification required by SBA Loan Application Form 2483:
- To substantiate 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.
- The 2019 Form 1040, Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period; 2020 information cannot be used.
There are other rules in the IFR, but they are not summarized here.
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