More emergency funding; Finally some tips for self-employed people trying to get a PPP loan Nexsen Pruet, SARL
On March 27, 2020, the President enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to provide emergency assistance and healthcare response to individuals, families and businesses affected by the coronavirus pandemic. CARES Act Enables the United States Small Business Administration (“SBA”) to 100% Guarantee Loans Under New Program Called “Paycheck Protection Program” (“PPP”) , with the total amount of loan principal and accrued interest. eligible for loan forgiveness under special circumstances. The goal of the program is to provide immediate relief to small businesses. For more details on PPP, read this.
The initial funding for the program was exhausted within weeks; however, on April 21st, the Senate passed legislation, the Paycheck Protection Program and the Health Care Enhancement Act, authorizing an additional $ 310 billion for PPP and $ 10 billion for economic disaster loan subsidies. The House is expected to vote on the legislation Thursday April 23rd before it is sent to the President for signature.
To be eligible for PPP, the organization must be a small business with 500 or fewer employees, or specific private non-profit organizations and veterans organizations. The small business category includes sole proprietors, independent contractors and the self-employed. Individuals with self-employment income are eligible if: (i) the business was in operation on February 15, 2020; (ii) your primary place of residence is in the United States; and (iii) you have filed or will be filing a Form 1040 Schedule C for 2019.
Recently, the SBA issued additional guidance, in the form of an interim final rule, for individuals with self-employment income who file a Form 1040 Schedule C. The maximum loan amount under the PPP is less than the company’s total average monthly payroll. fees ”in the one-year period before the loan was granted multiplied by $ 2.5 million or $ 10 million. Typically, salary costs are what you pay your employees plus benefits with certain exclusions and limitations. For the self-employed, the new directive defines “labor costs” as their net profit, or $ 100,000, whichever is less. This could be troubling for people who have been successful in minimizing taxes by maximizing their spending, as the amount they are now able to borrow under the program may turn out to be very small or even zero.
To calculate the maximum loan amount for sole proprietorships, independent contractors, and self-employed workers without employees, follow the steps below:
- Use the net profit amount from your Form 1040 in IRS Schedule C 2019. If you did not file your 2019 return, complete a draft Schedule C to calculate the value. If the amount is more than $ 100,000, reduce it to $ 100,000. If this amount is zero or less, you are not eligible for a loan under this program.
- Calculate the average monthly net profit amount by dividing the amount from step 1 by 12.
- Multiply the average monthly net profit amount from Step 2 by 2.5.
- Add the overdue amount of any economic disaster loan made between January 31, 2020 and April 3, 2020 that you are looking to refinance, if any, minus the amount of any economic disaster loan advance.
Those who are self-employed with employees can also follow the steps above, but are allowed to add the following to the amount calculated in step 1:
- 2019 gross salaries and tips paid to your employees whose principal place of residence is in the United States (limited to $ 100,000 per employee), and
- Employer health insurance contributions, pension contributions and national and local taxes assessed on employee compensation in 2019.
As proof of the amount you are able to borrow, the following should be included with your loan application.
- For self-employed without employees, please include your 2019 Form 1040 Annex C, or a draft if you have not filed your taxes.
- For self-employed with employees, please include your 2019 Form 1040 Annex C, or a draft if you have not filed your taxes; and Form 941 and Quarterly Unemployment Insurance Tax Return Forms, along with proof of any pension and Medicare contributions, if applicable.
- Other documents may also include any IRS Form 2019 1099-MISC detailing compensation received from non-employees, invoices, bank statements, pay stubs, or other documents establishing that you are self-employed and that the business was in operation on or around February 15, 2020.
The interim final rule makes it clear that a 2019 Schedule C must be included to apply for a PPP loan, although 2019 tax returns are not due until July 15. While the guidelines allow applicants to submit a draft of their 2019 Schedule C if they have not filed their return, this can still present a significant disadvantage to self-employed workers as they will need to prepare or have this form prepared on as quickly as possible. possible.
Ultimately, the new SBA guidelines can present challenges for a large portion of the self-employed, resulting in many receiving lower loan amounts while others may no longer qualify. It also adds an additional requirement, the preparation of a 2019 Schedule C, which can consume already limited time and resources amid the tumultuous COVID-19 storm many find themselves in.
An overview and comparison of PPP and Economic Disaster Lending programs can be found here.