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PPP Loans for the Self-Employed: SBA Q&A

PPP Loans for the Self-Employed: SBA Q&A

The U.S. Small Business Administration’s Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll.

In today’s blog post, Tom talks through some questions and answers that he’s been getting on the specifics of the PPP loans for those who are self-employed.

by Tom O’Saben, EA

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SBA Interim Final Rule

Hi everybody, Tom O’Saben coming to you from the Southern Command Center of the University of Illinois Tax School, hunkering down in my remote office in Maryville, Illinois. And what we’re going to do this week is talk about the paycheck protection loans as they apply to self-employed people. Now, I just found out about two minutes before I decided to record this, that the PPL and the EIDL programs have both run out of money. But I also know that there’s a conversation going on within Congress to add additional funding, I think the number was $250 billion that the President and the Secretary of the Treasury were looking to add to the program. Plus, I think there’s also going to be some good information that we’ve got directly from SBA to help you in advising your clients when they talk about how much of their loans could be forgiven, and what the money could be used for.So the first slide that’s going to come up for you here, we’re going to give you actually web address, and I’m gonna be looking at some of these as we talk as well. So you’ve got the web address that goes directly to SBA if you want to go ahead and look for the specific rules. Now this is the third round of interim final rules if you can believe that. So SBA has three times said, these are final rules and we’re hearing there’s going to be a fourth time. So what we’re going to talk about is dealing with some of these questions that have come out of these interim final rules. First of all, are schedule C filers eligible for a PPP loan (assuming it has some money)? The answer is yes. Here are the rules as the slide is showing you and thank you to Gina for doing the technical side of this since I don’t know how. Okay, were they in operation on February 15 of 2020 (not started operations, but were they in operation as of February 15 of 2020)? If they were an individual was self employment income, such as an independent contractor or sole proprietor… have a principal place of residence in the United States (we’re talking about US citizens)… filed or will file a US Form 1040, Schedule C for 2019. That’s the first requirement.

So then the second question asks, and we can have a slide pop up on this one. How about Schedule C filers who are not in business in 2019 but were in business on February 15, 2020. Here’s where we’re going to have to watch for the fourth round of interim final rules. SBA has indicated in intends to issue guidance on those businesses that were not in operation but were in operation and will in fact, be filing a Schedule C for 2020. So stay tuned for that one. The third question that I thought was appropriate and I’m kind of basing this on some of the things that come across Facebook, with our group. So it says are partners in a partnership with self-employment income eligible for PPP loans (should be seen the slide come up right now)? The partners themselves, SBA says no, but the partnership itself may in fact, take advantage of the partner’s self-employment income for purposes of computing the maximum loan amount they can get. So that’s what SBA says: partners- no; partnership – I’m going to say maybe depending on how the calculation is done. So then the third piece of guidance that we’ve got from SBA (next slide coming up), how do schedule C filers calculate the maximum PPP loan amount? There are two steps in this process. The first step is to look at –  are we dealing with a situation of a self-employed person with no employees, or a self employed person with employees? So we’ll talk about the self-employed person first that has no employees. And you can see the steps here on on the slide as we’re showing it to you. Step one, take the bottom line Schedule C income. Okay. Interestingly enough, you might want to know, if that’s zero or negative, then they’re not eligible. So I’m wondering if taxpayers are going to ask for some preliminary let’s call it schedule C’s to be generated. We still have a few months before 2019 returns are due and say, Hey, don’t put any depreciation on that Schedule C. Just give it to me without depreciation, then we’ll meet with you later after I get this loan done  and we’ll talk about writing off as much as we can. Sounds like an ethical dilemma to me. Step two, take that amount from line 31 and divide it by 12. And don’t forget no more than $100,000. That sounds familiar, doesn’t it? That’s the same kind of number we use with regular payroll. Payroll for the previous 12 months, but not to exceed $100,000 per person. So don’t take any more on that bottom line Schedule C than $100,000. Okay. So divide that by 12. Then step three says take that times 2.5. Again, this is probably a number that you’re relatively comfortable with. You’ve seen this. Okay. Then the final step for the self-employed person with no employees is to add any outstanding EIDL economic disaster monies they may have received that they want to roll into and refinance through the paycheck protection loan and any advance under the EIDL, those $10,000 I guess forgivable emergency loans that they can make. Don’t forget that.

Okay, if we can bring up the next slide, we’ll talk about a Schedule C now that has employees. So take the same circumstance we just described with the individual with no employees with a little bit of a wrinkle. Remember the $100,000 limitation? Now, you might also remember that if it is zero or less, enter zero? Well, in this case, if it’s a loss or zero, use zero. So the individual with employees doesn’t quite come out as badly as the individual that has no employees. Okay. So step one, take whatever line 31 is not to exceed $100,000. Also not less than zero, step one. Okay. Then add Medicare wages from 941s for the 12 month period of time that we’re looking at. Let’s assume we go April to April, I realize we’re in the middle of a quarter or the beginning of the second quarter, so you may have to do payroll reports and then those second quarter reports going all the way through now, payroll reports now in April of 2021. Take the Medicare wages. Add health benefits, but again, not more than $100,000 for each employee. We can also go back to the Schedule C, and we can add employee benefits that are being paid for employees, the owners benefits would not be on Schedule C, from line 14, and also any retirement plan benefits that have been done for the employees, not the employer on line 19 of the Schedule C. And we can also go to the payroll reports and add in the state and local taxes. Okay, after you’ve made that soup, take that total divided by 12. Take that result, multiply it by 2.5. Again, sounds familiar. Once again, just like with the self-employed person with no employees, then add in any EIDL or advance loan that we want to roll in to this paycheck protection loan. Let’s take a look at the next SBA statement. What can Schedule C filers use those PPP loan proceeds for? A lot of statements out there, out on Facebook. And again, if we can have the slide.  Owner compensation replacement calculated on what –  the 2019 net profit, I find that interesting. So it’s not necessarily paying payroll, it could also be compensating the owner, assuming it’s not more than the net profit was in 2019. Another one of those thoughts as to what’s that 2019 bottom line profit? Employee payroll costs for employees who live again in the United States – what it really says is their principal residences in the United States. Mortgage interest on business mortgage obligations or real or personal property, business, rent, business utilities, guess what, there’s a simple way to look at all this. Take any of the deductions that would have appeared on Schedule C, and you know what, by attachment, I would assume that SBA is also applying these rules to a Schedule F filer, I can’t believe they would have singled out farmers and not made them eligible for these programs. Although I have to say what SBA is telling us is Schedule C, but I’m going to go by extrapolation and say the Schedule F farmer should at least call their bank, because the PPP program is administered from the bank and again, as of today, out of money. So let’s see if Congress can get their act together and appropriate some more money. The only I would think I would say, and it’s based on this last bullet point I have on the page. In other words, as I started to, say, include the same expenses that you would on a 2019 Schedule C. But of course, owners compensation wouldn’t be there like owners draw is never on a Schedule C. But that again is the first bullet point can also be a use of the loan money that is approved.

Okay. Let’s go on and talk about how the loans are forgiven. This would be the next slide Gina, thank you. What amounts are forgiven? The actual amount of loan forgiveness will depend on that eight week period of time just like it does for I’ll call them non self employed businesses that have payroll. The payroll costs, salaries, wages, tips under $100,000 annualized including health care expenses, retirement, state taxes, and also unemployment. Okay. Owners compensation based on the 2019 net profit. But look at this, there’s a little wrinkle in that, because of this eight week period of time, it’s limited to basically 8 over 52 weeks. In other words, you can’t take a whole year of profit, you can only take 8 divided by 52. How many weeks are there in a year? 52. How many weeks are in this test period, let’s call it? 8. So that owner can’t take a whole year just 8/52. But we also have to exclude any sick leave equivalent where a credit is coming through under the Family’s First Act where you might recall if you attended our webinar a couple weeks ago, we talked about the employer being able to retain the taxes they withheld, the payroll taxes, in order to provide sick leave benefits. And then they can use that money to actually compensate themselves for paying the employees. Payments on interest, mortgage obligations, real personal property incurred before February 15 to the extent what? Looking for expenses that would have been deductible on the Schedule C, or again, maybe I’m stepping on a limb I don’t belong on, but I’m going to say I would also assume Schedule F would come into play on this one. Some additional amounts that are possible to be forgiven (another slide here, please) rent payments on lease agreements where the lease was enforced before February 15. Again, to the extent that they’re deductible on Schedule C. Utility payments for service agreements, doesn’t say services rendered but service agreements before February 15. Again, to the extent that they’re deductible on Schedule C. Do you see what they’re trying to do here? They don’t want people running out and incurring additional expense in order to have these loans forgiven. They’re supposed to be for their normal operating expenses that would have existed anyway. In addition, 75% of the amount forgiven must be attributable to payroll costs. And you can see the definition that’s been  a lot of questioning that’s been coming up on Facebook as well. Talking about what can it be used for? We see salaries, wages, commissions, cash, tips, vacation, parental family, medical sick leave, and you can read rest, including health insurance. Hopefully this gives you some guidance.

Okay, the final slide I have because I try to keep these blogs short, but nothing short in the tax world now, including the filing season. You know, I first was excited that April 15 wasn’t the filing deadline. Uh not so much because it’s just not going away. So our final slide talks about what documentation will Schedule C filers be required to provide the lenders for loan forgiveness? In addition to their certification required is certification statement they have to sign,  the Schedule C filer will be required to submit copies of the 941s and their unemployment reports, evidence of business rent, business mortgage payments, real or personal property, business utilities, etc. during the covered period if the Schedule C filer use the PPP loan proceeds for those purposes. Now, I might add, there’s no requirement that the employer use the money for these purposes. But if they want to have any of it forgiven, then that’s where they’re stuck in having to go ahead and make sure they document what it’s been used for. And I think it’s also interesting that we can use it for owners compensation, but notice how there was the 8/52s limit.

Running a little bit long on the blog. I hope this gives you some additional information. Boy, it’s really really a crazy time, isn’t it? So I’m going to help to talk you through this. Again, if the PPP program, in fact isn’t refunded, at least now you’ve got some tidbits to use with your clients as to how they come with next set of questions, which is how do I document getting part of this forgiven? So we’ll cut this off here. We hope you’re staying safe. Be safe. Don’t forget taking care of yourself. And this is Tom O’Saben from the University of Illinois Tax School, hunkering down in the Southern Command Center in Maryville, Illinois, saying I’ll say goodbye for just a while.

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