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Paycheck Protection Program Second Interim Final Rule Summary – April 16, 2020

On April 14, 2020, the SBA released a second interim final rule clarifying various aspects of the Paycheck Protection Program (PPP).

  • Individuals with self-employment Income who File a Form 1040, Schedule C are eligible for a PPP loan if: (i) they are in operation on February 15, 2020; (ii) are an individual with self-employment income (such as an independent contractor or a sole proprietor); (iii) have a principal place of residence is in the United States; and (iv) have filed or will file a Form 1040 Schedule C for 2019.
  • For individuals with income from self-employment, the proceeds of a PPP loan can be used for the following: (i) Owner compensation replacement, calculated based on 2019 net profit, (ii) Employee payroll costs for employees whose principal place of residence is in the United States, (iii) Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property, business rent payments, and business utility payments. Borrower’s must have claimed or be entitled to claim a deduction for such expenses on the 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan.
  • The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on: owner compensation replacement, payroll costs, mortgage interest payments, business rent payments, and business utility payments.
  • Under the SBA’s present calculation, every self-employed individual applying for the PPP with no employees will have to repay some amount of their loan. Self-employed individuals’ maximum loan amount is determined on a monthly basis, and is $20,833 ($100k/12x2.5). In contrast, the maximum forgiveness amount for owner compensation is determined on a weekly basis and must be based on the taxpayer’s 2019 Schedule C, Line 31 (Net profit or Loss). For an individual making $100k, the maximum forgiveness amount for owner compensation is $15,385. Assuming an individual spends the remainder of the loan amount on forgivable overhead expenses, and applies the 25% non-payroll limitation to the forgiveness amount, there would be a gap of 1.53% of the loan amount for which forgiveness becomes impossible. 
  • Partnerships are eligible for a PPP loan however, partners in a partnership may not submit a separate PPP loan application as a self-employed individual. The self-employment income of general active partners may be reported as a payroll cost, up to $100k annualized on a PPP loan application filed by or on behalf of a partnership. 
  • 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. 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. 
  • Self-employed individuals will need to rely on their 2019 Form 1040 Schedule C, which provides verifiable documentation on expenses between January 1, 2019 and December 31, 2019. For individuals with income from self-employment from 2019 for which they have filed or will file a 2019 Form 1040 Schedule C, expenses incurred between January 1, 2020 and February 14, 2020 may not be considered because of the lack of verifiable documentation on expenses in this period. The SBA will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020, and (ii) will file a Form 1040 Schedule C for 2020. 
  • At least 75 percent of the PPP loan proceeds must be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced EIDL will be included. 
  • For loan forgiveness, 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. 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). 
  • Businesses with legal gaming revenues are not rendered ineligible for a PPP loan if they meet the existing standard or if 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. Businesses that received illegal gaming revenue are categorically ineligible.