SBA Issues New Paycheck Protection Program Guidance

The COVID-19 emergency has left many Philadelphia and New Jersey companies without revenue or means to generate cash flow. The combination of forced business closures, shelter-in-place orders, and general concern about exposure to the virus has left businesses without customers and dwindling demand. The unfortunate reality is loans, and other funding sources are quickly needed to provide a working capital infusion. While there are various state and federal emergency funding programs, the Paycheck Protection Program (PPP) has become a popular option for many business owners. Although lenders started accepting applications over a week ago, there has been a lot of confusion about loan eligibility, calculation method, and application specifics. To help clarify program specifics, on April 14, 2020, the SBA released an Interim Final Rule (the Rule) updating previous eligibility guidance published on April 6. To help clients, prospects, and others, Klatzkin has provided a summary of key points below.

Key PPP Updates

Individuals with Self-Employment Income

There has been confusion about whether individuals with self-employment income are eligible for the PPP loan. The Rule states eligibility is based on whether they were in operation on February 15, 2020, are an individual with self-employment income (such as an independent contractor or sole proprietor), have a principal place of residence is in the U.S. and they have or will file a Form 1040 Schedule C.

Individuals in Partnerships

The Rule also provides guidance on whether partners in a partnership are eligible to apply. Those individuals involved in a partnership are not permitted to submit a separate loan application as a self-employed individual. Instead, the self-employment income of active partners may be reported as a payroll cost, up to $100,000, on the application submitted by the partnership.

Loan Amount Calculation 

To help self-employed individuals determine how to calculate their eligible loan amount, the Rule provides information and examples. It’s important to note the process varies between the self-employed and self-employed with employees. The calculation method for self-employed individuals with no employees it outlined below.

• Calculation Method –Compute 2019 average monthly payroll by finding the 2019 IRS Form 1040 Schedule C line 31 net profit amount (if 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, then eligibility is lost. Next, calculate the average monthly net profit amount (divide the amount from Step 1 by 12). Then, multiply the average monthly net profit amount from the previous step, by 2.5. Finally, 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.

The calculation method for the self-employed with employees has some additional steps and will be detailed in a later blog post.

Loan Forgiveness  

The Rule states the amount of loan forgiveness can be up to the full principal amount plus accrued interest. However, the actual amount of loan forgiveness will vary depend on the borrower and is contingent on the total amount spent on the following:

• Payroll Costs– This includes salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits 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 – This calculation is based on 2019 net profit with forgiveness limited to eight weeks’ worth (8/52) of 2019 net profit. Still, it excludes any qualified sick leave equivalent, or an eligible family leave equivalent amount.
• Mortgage Interest – Mortgage interest payments on real or personal property incurred by February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments).
• Rent Payments– This only includes 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).
• Utility Payments – Any utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments).

Loan Forgiveness Documentation

The Rule outlines the documentation that needs to be provided to the lender when applying for loan forgiveness. In addition to the borrower certification, borrowers should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms, evidence of business rent, business mortgage interest payments (on personal or real property) or business utility payments if loan proceeds were used for this purpose. Finally, for the self-employed, they need to rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner (to replace lost compensation) during the covered period.

More Guidance to Come

The SBA will issue additional guidance for individuals with self-employment income that was not in operation in 2019 but were on February 15, 2020, and will file a 1040 Schedule C for 2020. We will continue to monitor the program and post updates accordingly.

Contact Us

The Rule provides much-needed clarification and guidance for the self-employed and members of a partnership. There was also guidance given to lenders on loan applications and processing. It’s important to note the SBA has stated not to resubmit a loan application to comply with the new rule. They will continue to process applications submitted before the Rule issuance date. If you have questions about the information outlined above or need assistance with a COVID-19 business issue, Klatzkin can help. For additional information, click here to contact us.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change.  This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.