April 15, 2020

New Paycheck Protection Program Guidance Published

Atlanta businesses seeking a cash flow infusion due to the COVID-19 emergency have federal, state and local loan options. Since not every loan features the same terms and benefits it’s important to closely review terms to determine the best opportunity. Perhaps one of the most popular is the Paycheck Protection Program (PPP), a payroll focused forgivable loan administered by the Small Business Administration featuring low-interest rates and other favorable terms. Although lenders started accepting applications over a week ago, there has been a lot of confusion about loan eligibility for the self-employed, payroll calculation methods and documentation requirements. To clarify program specifics and provide additional guidance, on April 14, 2020, the Small Business Administration (SBA) released an Interim Final Rule with information on eligibility criteria and more information. To help clients, prospects, and others, Wilson Lewis has provided a summary of key points below.

Key PPP Updates

Individuals with Self-Employment Income

There has been confusion about whether individuals with self-employment income are eligible for the PPP loan. The Rule states eligibility is based on whether they were in operation on February 15, 2020, are an individual with self-employment income (such as an independent contractor or sole proprietor), have a principal place of residence is in the U.S. and they have or will file a Form 1040 Schedule C.

Individuals in Partnerships

The Rule also provides guidance on whether partners in a partnership are eligible to apply. Those individuals involved in a partnership are not permitted to submit a separate loan application as a self-employed individual. Rather the self-employment income of active partners may be reported as a payroll cost, up to $100,000, on the application submitted by the partnership.

Loan Amount Calculation

To help self-employed individuals determine how to calculate their eligible loan amount, the Rule provides information and examples. It’s important to note the process varies between the self-employed and self-employed with employees. The calculation method for self-employed individuals with no employees is outlined below. Note the other method is complex and therefore not included herein.

• Calculation Method – Compute 2019 payroll by finding the 2019 IRS Form 1040 Schedule C line 31 net profit amount (if not yet filed a 2019 return, fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, then eligibility is lost. Next, calculate the average monthly net profit amount (divide the amount from Step 1 by 12). Then, multiply the average monthly net profit amount from the prior step, by 2.5. Finally, add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan.

Loan Forgiveness 

The Rule states the amount of loan forgiveness can be up to the full principal amount plus accrued interest, However, the actual amount of loan forgiveness will vary between the borrower and is dependent on the total amount spent on the following:

• Payroll Costs – This includes salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums).
• Owner Compensation Replacement – This calculation is based on 2019 net profit with forgiveness limited to eight weeks’ worth (8/52) of 2019 net profit but excludes any qualified sick leave equivalent or a qualified family leave equivalent amount.
• Mortgage Interest – Mortgage interest payments on real or personal property incurred by February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments).
• Rent Payments – This only includes rent payments on lease agreements in force prior to February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments).
• Utility Payments – Any utility payments under service agreements dated prior to February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments).

Loan Forgiveness Documentation

The Rule outlines the documentation that needs to be provided to the lender when applying for loan forgiveness. In addition to the borrower certification, borrowers should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms, evidence of business rent, business mortgage interest payments (on personal or real property) or business utility payments if loan proceeds were used for this purpose. Finally, for the self-employed they need to rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner (to replace lost compensation) during the covered period.

Contact Us

The updated guidance addresses a broad variety of issues which may impact the application process. The SBA has stated if an application has been submitted that does not conform to this guidance it will not be necessary to re-apply. If you have questions about the information outlined above or need assistance with another COVID-19 issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.