Since the release of the CARES Act and announcement of the PPP, taxpayers have been anxiously awaiting additional guidance related to self-employed individuals. Yesterday, an interim final rule was released regarding additional eligibility criteria and requirements for certain pledges of loans.
Can individuals with self-employment income apply for PPP loans? And how do you calculate the maximum loan amount?
For individuals who have self-employment income and file 1040, Schedule C, and no employees, the maximum loan amount is based upon your 2019 IRS Form 1040 Schedule C net profit amount. The amount is limited to $100,000, and if the amount is zero or less, then you are not eligible for a PPP loan.
If you have employees in your business, you would include their 2019 gross wages and other employee costs in the calculation. Then the calculation follows the same as other businesses — Schedule C plus any employee wages divided by 12 to obtain monthly payroll, then multiply times 2.5.
Before this guidance was issued, many taxpayers and financial institutions were hoping the loan amount would be based on 1099’s received — which would be total income, not net profits. The Treasury believed this method of calculation would prevent a windfall that it did not intend.
What information will Form 1040 Schedule C filers need to provide?
Documentation for the loan amount will be either the actual 2019 Schedule C filed, or you may also provide an estimated 2019 Schedule C if you have not filed yet. You will also be required to provide any 1099-MISC received, invoices, bank statements, and any books.
How can the loan proceeds be used?
The proceeds of the loan can be used for owner compensation replacement and employee payroll costs. If you claim expenses for mortgage interest, other rent expenses, and utility payments on your 2019 1040, Schedule C, then you are eligible to use proceeds of the loan for those expenses. Following the previously released guidance, the proceeds must be used 75% for payroll expenses and be used in the same manner as other businesses.
What about partners in partnerships?
The guidance also addressed that if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. The self-employment income of general active partners will need to be included in payroll costs on PPP loan application as filed by the partnership.
In addition, you should be aware that participation in the PPP may affect your eligibility for state administered unemployment compensation or unemployment assistance programs.
If you have questions regarding this new guidance, please contact us.