Update: Payment Protection Program Guidelines for Sole Proprietors and Independent Contractors

Note: This article was originally published on 04/17/2020 and was last updated on 5/29/2020. For more information on the CARES Act, visit COVID-19 CARES Act Guidance.

The Small Business Administration (SBA) issued a second interim final rule interpreting the Paycheck Protection Program (PPP) of the CARES Act on April 14, 2020 (the “Second Interim Final Rule”), supplementing the first Interim Rule issued on April 2, 2020 with guidance for sole proprietors and independent contractors. This rule also addresses eligibility issues for particular business concerns and requirements for individual pledges of PPP loans.

On April 16, 2020, the PPP hit its $349 billion cap and is out of money. According to Neil Bradley, executive vice president and chief policy officer at the U.S. Chamber of Commerce, more funding for the PPP program will come soon. The SBA announced on April 17, 2020 that it is no longer accepting applications PPP from lenders[1]. Some of the banks continue to take PPP applications and plan to process them when the PPP re-opens.

This update is an overview of the Second Interim Final Rule.

Individuals with Self-Employment Income who File a Form 1040, Schedule C

The PPP applies to individuals with self-employment income who had business operations on February 15, 2020, had self-employment income, whose principal place of residence is in the United States and who filed or will file a Form 1040 Schedule C for 2019.[2]

Partnerships

Partnerships are eligible for a PPP Loan. However, a sole proprietor who is a partner in a partnership may not submit a separate PPP loan application as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost (up to $100,000 annualized) on a PPP loan application filed by or on behalf of the partnership.

Maximum Loan Amount

The maximum loan amount depends upon whether or not the self-employed applicant employs other individuals.

If the applicant does not have any employees, the applicant should follow the following methodology to calculate the maximum PPP loan amount:

Step 1: Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out, and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.

Step 2: Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).

Step 3: Multiply the average monthly net profit amount from Step 2 by 2.5.

Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

If the applicant has employees, the applicant should follow the following methodology to calculate the maximum PPP loan amount:

Step 1: Compute 2019 payroll by adding the following:

  • Your 2019 Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized, if this amount is over $100,000, reduce it to $100,000 if this amount is less than zero, set this amount at zero
  • Gross wages and tips (2019) paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee over $100,000 (annualized) and any amounts paid to any employee whose principal place of residence is outside the United States
  • Employer (2019) health insurance contributions (health insurance component of Form 1040 Schedule C, line 14), retirement contributions (Form 1040 Schedule C, line 19), and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).

Step 3: Multiply the average monthly amount from Step 2 by 2.5.

Step 4: Add the outstanding amount of any EIDL made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Required Documentation

The applicant must provide the 2019 Form 1040 Schedule C along with the PPP loan application amount and a 2019 IRS Form 1099-MISC, invoice, bank statement or book of record to show that the applicant is self-employed. The applicant must provide a 2020 invoice, bank statement or publication of record to show that the business was in operation on February 15, 2020.

Self-employed applicants with employees must provide the 2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020, must be provided to show that the business was in operation on February 15, 2020.

Qualified Expenses

The proceeds of the PPP loan are to be used for:

  • Owner’s compensation up to $100,000, annualized as calculated by net profit (Schedule C, line 31)
  • Employee payroll costs (as discussed in previous SBA guidance)
  • Mortgage interest payments on business obligations related to real or personal property
  • Business rent payments and business utility payments
  • 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).[3]

To use the PPP loan on an expense, the borrower must have claimed a deduction or be entitled to claim a deduction on the expense on the 2019 Schedule C. This restriction means in order to use the PPP loan for a utility bill, the borrower must have claimed a deduction in 2019 for this similar expense.

Loan Forgiveness

Wages, up to $100,000 annualized, are eligible for forgiveness. This is calculated on a weekly basis, so a maximum of $15,385 per employee (8 weeks out of 52 weeks) will be eligible for forgiveness.

The other eligible expenses for forgiveness are retirement contributions, health insurance premiums, rent, utilities and interest. The Second Interim Final Rule indicates that sole proprietors and independent contractors are only eligible to receive forgiveness of a maximum of $100,000 of Schedule C for their own compensation. This means the $100,000 maximum is inclusive of retirement contributions and health insurance for owners only.

Moreover, an expense will only be eligible if such expense was incurred in 2019. This limits the ability of the borrower to add new expenses to qualify for PPP loan forgiveness.

Clarification Regarding Eligible Businesses

Owners/Directors of PPP Lenders

The Second Interim Rule clarified that an entity that is otherwise eligible for the PPP Loan will not be considered ineligible if it is owned (in whole or part) by an outside director or holder of a less than 30% equity interest in a PPP lender. Such entity may apply for a PPP loan from the PPP lender on whose board the director serves or in which the equity owner holds an interest, provided that the eligible business owned by the director or equity holder follows the same process as any similarly situated customer or account holder of the lender.

Favoritism by the lender in processing time or prioritization of the director’s or equity holder’s PPP application is prohibited. The lenders should comply with all other applicable state and federal regulations concerning loans to associates of the lender. Lenders should also consult their internal policies concerning lending to individuals or entities associated with the lender.

Legal Gambling

An entity that is otherwise eligible for the PPP will not be considered ineligible due to legal gambling revenue as long as (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% of the business’s total revenue in 2019. Businesses that received illegal gaming revenue are categorically ineligible.


[1] SBA has also stated that the EIDL program also ran out of money and the SBA is no longer taking EIDL applications.

[2] SBA stated that it will issue additional guidance for those self-employed individuals in operation on February 15, 2020, but not in operation in 2019, to apply for PPP Loans.

[3] 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.