April 20, 2020 Update – CARES Act Loan Programs for Businesses
KEEPING YOU INFORMED…
On April 14th, the U.S. Small Business Administration (the “SBA”) issued an interim final rule on the Paycheck Protection Program (“PPP”) as authorized by the CARES Act. You can find the interim final rule at:
Although the SBA has indicated that the funds available under the CARES Act for PPP loans have now been depleted, it is anticipated that additional funding for PPP loans will be authorized under the additional stimulus legislation now being considered by Congress. Therefore, if you have not yet submitted an application for a PPP loan, you may still have the opportunity to do so and should have your application ready to submit at the appropriate time.
The interim final rule clarifies that a partner in a partnership may not apply for a PPP loan as a self-employed individual. A general active partner’s self-employment income (up to $100,000 annualized) may, however, be included as a payroll cost in the PPP loan application submitted by a partnership. The same is true for an active member of an LLC filing taxes as a partnership. The SBA noted participation in the PPP may effect a partner’s eligibility to receive state administered unemployment compensation or assistance programs, including the programs authorized by Title II Subtitle A of the CARES Act or CARES Act Employee Retention Credits. The interim final rule does not address whether or not an affected applicant can amend its application to include the partner’s or member’s income.
The interim final rule also sets forth the eligibility criteria, methodology for calculating the PPP loan amount, required documentation to be submitted, permitted uses of the PPP loan and the PPP loan amount eligible for forgiveness. An individual with self-employment income (e.g., an independent contractor or a sole proprietor) is eligible to file a PPP loan application if:
– the individual’s business was in operation before February 15, 2020*;
– the individual’s principal residence is in the United States, and
– the individual filed or will file a Form 1040 Schedule C for 2019.
The calculation of the PPP loan amount that a self-employed individual may apply for depends on whether or not the individual has employees. The interim final rule sets forth the method of calculation in each circumstance. The documentation that must be submitted in support of an individual’s application includes the individual’s 2019 IRS Form 1040 Schedule C, whether or not it has been filed. An applicant with no employees must also submit 2019 IRS Form 1099-MISC and an invoice, bank statement or book of record establishing the individual’s self-employment in 2019 and on February 15, 2020. An individual with employees must submit IRS Form 941 (or other tax forms or payroll processing records with similar information), state quarterly wage unemployment insurance tax reporting forms for each quarter of 2019 or equivalent payroll processing records, evidence of retirement and/or health insurance contributions and a payroll statement or similar documentation for the pay period covering February 15, 2020.
Self-employed individuals may use the proceeds of the PPP loan for owner compensation replacement (based on 2019 net profit), expenditures made in 2019 for employee payroll costs, expenses such as mortgage interest, business rent, business utilities, and interest on other debt obligations incurred before February 15, 2020. The applicant must have claimed or be entitled to claim a deduction for such expenses on his/her 2019 Form 1040 Schedule C for those expenses to be a permissible use during the eight week period following the first disbursement of the loan. The loan can also be used to refinance an SBA Economic Injury Disaster Loan made between January 31 – April 30, 2020. At least 75% of the proceeds of the PPP loan must be used for payroll costs.
The portion of the PPP loan eligible for forgiveness includes payroll costs up to $100,000 of annualized pay per employee, health care expenses, retirement contributions and state payroll taxes paid for his/her employees (not for the owner), ownership compensation replacement (limited to eight weeks’ worth of 2019 net profit), and payments for mortgage interest, rent and utilities to the extent they are deductible on IRS Form 1040 Schedule C. The maximum amount of loan forgiveness is based on the individual borrower’s eligible payments over the eight week period following the date of the loan disbursement, however 75% of the amount forgiven must be attributable to payroll costs.
We hope that you and your families are well and stay healthy. If you have questions about PPP loans or other SBA loan programs, please contact Jeff Zankel, Steve Godsberg, Patricia Delaney or one of our other attorneys at the direct dial number or email address indicated on the contact information page attached to this memo.
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*Additional guidance will be forthcoming from the SBA for individuals with self-employment income who were not in operation in 2019, but were in operation on February 15, 2020 and will file a Form 1040 Schedule C for 2020.
THIS MEMORANDUM IS MEANT TO ASSIST IN THE GENERAL UNDERSTANDING OF THE CURRENT LAW. IT IS NOT TO BE REGARDED AS LEGAL ADVICE. THOSE WITH PARTICULAR QUESTIONS SHOULD SEEK THE ADVICE OF COUNSEL.
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© Lamb & Barnosky, LLP 2020