The SBA released a supplemental interim final rule today to provide further guidance for individuals applying to the Paycheck Protection Program (PPP), the cornerstone small business lending program under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. You can read our previous description of the PPP here. 

1. Supplemental Interim Final Rule

Although independent contractors and self-employed individuals became eligible to apply for the PPP on April 10, 2020, there was still some uncertainty as to how the PPP would be implemented for independent contractors and self-employed individuals. Today’s interim final rule attempts to provide clarity on some of these outstanding issues.

A. Eligibility

Individuals are eligible for a PPP loan if:

1. They were in operation on February 15, 2020;
2. Their principal place of residence is in the United States;
3. They are an individual with self-employment income (such as an independent contractor or a sole proprietor); and
4. They filed or will file a Form 1040 Schedule C with the IRS for 2019.

Partners in a partnership must submit a single PPP application at the partnership level and treat the self-employed income of general active partners as payroll.

The SBA will issue additional guidance for those individuals with self-employment income who were not operational in 2019 but who were in operation on February 15, 2020 and will file a Form 1040 Schedule C for 2020.

B. How much can an individual borrow?

If you have no employees: Self-employed individuals with no employees may borrow an amount equal to 2.5 times the net profit amount from 2019 (located on 2019 IRS Form 1040 Schedule C line 31) up to a $100,000 maximum, divided by 12 to get the monthly amount. You may add any amount of an SBA economic injury disaster loan (EIDL) obtained between January 31, 2020 and April 3, 2020. 

If you have employees: Self-employed individuals with employees may borrow an amount equal to the net profit amount from 2019 (located on 2019 IRS Form 1040 Schedule C line 31) up to $100,000, plus 2019 gross wages and tips paid to U.S. resident employees computed using 2019 IRS Form 941 Taxable Medicare wages & tips, pre-tax employee contributions for health insurance or other fringe benefits excluded from such amount, and subtracting any amounts paid to any individual employee in excess of $100,000 annualized, plus 2019 employer health insurance contributions, retirement contributions and state and local taxes assessed on employee compensation; all divided by 12 to get the monthly amounts, and multiplied by 2.5. You may add any amount of an SBA economic injury disaster loan (EIDL) obtained between January 31, 2020 and April 3, 2020.

Regardless of whether you have filed the 2019 Form 1040, you will need to provide the form with your application, as well as a 2019 IRS Form 1099-MISC detailing nonemployee compensation received, invoice, bank statement or book of record that establishes you are self-employed. Payroll amounts will also need to be supported by documentation, including Form 941, state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processing records, along with evidence of retirement and health insurance contributions, as necessary.

C. How can you use PPP loan proceeds?

Individuals must use the proceeds from the PPP on:

• Owner compensation replacement, calculated based on 2019 net profit set forth on 2019 IRS Form 1040 Schedule C line 31;
• Employee payroll costs for employees that are U.S. residents, if you have employees;
• Mortgage interest payments on business mortgage obligations, business rent obligations and business utility payments. You must have claimed or be entitled to claim a deduction for these expenses on your 2019 IRS Form 1040 Schedule C to be eligible for forgiveness;
• Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amount is not eligible for loan forgiveness); or
• Refinancing an SBA EIDL made between January 31, 2020 and April 3, 2020.

At least 75% of the forgiveness amount must be used on payroll expenses.

D. What amounts are eligible for forgiveness?

The amount of loan forgiveness available up to the full principal amount of the loan and accrued interest will equal the amount actually paid or incurred during the first 8 weeks of the loan for:

• Payroll costs, including salary, wages and tips up to $100,000 of annualized pay per employee, plus covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll;
• Owner compensation replacement, calculated based on 2019 net profit set forth on 2019 IRS Form 1040 Schedule C line 31;
• Payments of interest on business mortgage obligations incurred before February 15, 2020, to the extent deductible on Form 1040 Schedule C;
• Business rent payments on lease agreements in force before February 15, 2020, to the extent deductible on Form 1040 Schedule C; and
• Business utility payments in service on February 15, 2020, to the extent deductible on Form 1040 Schedule C.

Documentation showing the above payments will need to be provided to the lender in order to receive the loan forgiveness. 

2. What are the next steps?

If you think that you are eligible for the PPP, you may submit an application with any eligible lender. Many lenders are only accepting applications from existing business customers. If you do not already have a relationship with an eligible lender, the SBA’s website may be able to match you with an eligible lender. PPP funds will be disbursed on a “first come, first served” basis, but the President has indicated that he will seek additional funds if the funding runs out.