The Initial Rule clarified that an applicant is not permitted to include in its payroll costs amounts paid to independent contractors used in the operation of the applicant’s business but that the independent contractors could apply for their own PPP Loans. No detailed guidance regarding the applicability of the PPP Loan program to independent contractors was included in the Initial Rule.
The SBA authorized lenders to begin taking applications for PPP Loans for most eligible businesses on April 3, 2020 but delayed authorization to accept applications from independent contractors until April 10, 2020.
On April 14, 2020, the SBA issued an additional interim final rule (the “Independent Contractor Rule”) which provides additional guidance for self-employed individuals and independent contractors seeking a PPP Loan.
Under the Independent Contractor Rule, in order for a self-employed individual or independent contractor to qualify for a PPP Loan:
– the applicant must have been in operation on February 15, 2020;
– the applicant must be an individual with self-employment income (such as an independent contractor or sole proprietor);
– the applicant’s principal place of business must be in the United States; and
– the applicant must have filed, or will file, a Form 1040 Schedule C for 2019.
The Independent Contractor Rule indicates that further guidance from the SBA will be forthcoming for any self-employed individuals who were not in operation in 2019 but were in operation as of February 15, 2020, and will file a Form 1040 Schedule C for 2020.
For a self-employed individual with no employees, the amount of the PPP Loan is calculated based on the individual’s net profit for 2019, as shown on line 31 of the individual’s 2019 Form 1040 Schedule C. If the individual has not yet filed a return for 2019, Schedule C for 2019 will need to be completed in conjunction with the application for the PPP Loan. The loan amount will be the applicant’s net profit amount for 2019 (not to exceed $100,000), divided by 12 and then multiplied by 2.5. For example, an applicant with net profit in 2019 of $12,000 would be eligible for a loan of $2,500, and an applicant with a net profit in 2019 of $200,000 would (after application of the $100,000 cap) be eligible for a loan of $20,833. If the applicant obtained an Economic Injury Disaster Loan (“EIDL”) through the SBA between January 31, 2020, and April 3, 2020, the amount of that loan may also be refinanced as part of the PPP Loan.
In order to apply for a PPP Loan, a self-employed individual will need to submit:
– the SBA’s PPP Loan application form;
– the applicant’s 2019 Form 1040 Schedule C (which must be provided even if the applicant has not yet filed a return for 2019);
– a 2019 Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes that the applicant is self-employed;
– a 2020 invoice, bank statement, or book of record that establishes that the applicant was in operation on or around February 15, 2020; and,
– any other information required by the lender.
A self-employed individual without employees receiving a PPP Loan may use the loan proceeds for:
– owner compensation replacement;
– interest (but not principal) on any business-related secured debt;
– business-related rent payments;
– business-related utility payments;
– interest (but not principal) on other business-related debt obligations incurred before February 15, 2020; and
– refinancing of any EIDL loan received between January 31, 2020, and April 3, 2020.
Use of loan proceeds for items such as interest, rent, and utilities is only allowed to the extent that the applicant had expenditures for such categories reflected on the applicant’s 2019 Form 1040 Schedule C.
At least 75% of the loan proceeds must be used for payroll costs.
The PPP Loan is eligible for full or partial forgiveness based on the use of the loan funds over the eight week period following the first disbursement of the loan. For a self-employed individual without employees, the amount forgiven will be the total amount spent during such eight week period on:
– owner compensation replacement for eight weeks (calculated based on the 2019 net profit and subject to the $100,000 annual cap);
– interest on secured debt obligations existing before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C;
– rent on lease agreements existing before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C;
– utility payments under service agreements existing before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C.
Owner compensation in an amount in excess of eight weeks is not eligible for forgiveness.
In applying for forgiveness of the PPP Loan, eight weeks of net profit, based on the 2019 Form 1040 Schedule C submitted with the loan application, and subject to the $100,000 annual cap, will be permitted to be forgiven. If the borrower is requesting forgiveness for eligible interest, rent, or utility payments, evidence of payment of such costs must also be submitted when applying for forgiveness.
The Independent Contractor Rule also clarifies that a partner in a partnership (including a member of a limited liability company which is taxed as a partnership) is not eligible to apply for a PPP Loan as a self-employed individual. Instead, the Independent Contractor Rule indicates that the partnership is permitted to apply for a PPP Loan and that the partnership can include the self-employment income of “general active partners” up to an annual cap of $100,000 for each such partner as part of the partnership’s payroll costs.
To the extent not forgiven, a PPP Loan will accrue interest at 1% and shall have a term of 2 years. Payments on PPP Loans are deferred for 6 months.
The Banking and Finance attorneys at Dvorak Law Group have the knowledge and experience to efficiently assist our clients with financing needs. Please contact Dvorak Law Group for specific questions and recommendations regarding how PPP Loans may assist your business and with help in the application process.
Read other articles related to COVID-19 here.
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Additional Guidance Issued On Paycheck Protection Loans Under The CARES Act
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