Treasury Department Issues Further PPP Loan Guidance for the Self-Employed
By: Richard Colella, Partner
Last night, the SBA issued guidance to lenders and applicants regarding the particulars of the Paycheck Protection Program (“PPP”) loans, which answered several questions concerning how self-employed individuals are to access PPP loan funding. “Self-employed” for this purpose means any business that passes through its business income to the owner(s) for tax purposes, from a one person operation to certain LLCs that can have many W-2 employees.
Initially, the updated guidance directs that the self-employment income of the owners of a partnership (or an LLC taxed as a partnership) is to be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the entity. This means that individual partners may not submit a separate PPP loan application as a self-employed individual. And while the existing general rules of the PPP loan program apply to self-employed individuals, a number of more specific provisions are set forth in this guidance.
The additional guidance provides details on the method for calculating the maximum loan amount for individuals with self-employment income who file a Form 1040, Schedule C, Profit or Loss From Business. The guidance requires submission of a 2019 Form 1040 Schedule C (even if the 2019 income tax return is not yet filed), and provides other detailed documentation guidelines, which vary depending on whether the business has other W-2 employees.
The new guidance also clarifies how PPP loans may be used by self-employed persons, and how loan forgiveness will be calculated. For example, self-employment income is determined by reference to 2019 net profit reported on Schedule C, and while the maximum loan amount can include up to 2.5 times the monthly average of this income, forgiveness will only apply to 8 weeks’ worth of such income. This means applicants should make sure that other forgivable uses, like rent and utilities, can consume the remaining portion of the PPP loan if the maximum amount is taken.
Additionally, the guidance generally limits the use of proceeds to the type and scope of expenses incurred in 2019, stating that “this limitation is consistent with the structure of the Act to maintain existing operations and payroll and not for business expansion.”
The updated guidance also cautions that if a self-employed individual does obtain a PPP loan, this may affect his or her ability to obtain unemployment benefits since at least 75% of the loan proceeds will, in essence, constitute compensation to that individual.
**This information is offered for discussion, marketing and news purposes and is not intended to constitute legal advice.**