Today, the Treasury and SBA issued the guidance on updated PPP loan procedures for qualified Schedule C filers applying for a first or second draw loan. In order to benefit from these new regulations, a sole proprietor, independent contractor, or self-employed individual must file a Schedule C with their individual income tax return. It is also important to note that these new regulations only apply to new PPP loans. If a Schedule C filer already submitted its application, the borrower cannot go back and recalculate the PPP loan. Below are a few additional takeaways from the new guidance—

• The new calculation if the Schedule C does not have any employees:
  • Step 1: From your 2019 or 2020 IRS Form 1040, Schedule C, you may elect to use either your line 31 net profit amount or your line 7 gross income amount. (If you are using 2020 to calculate payroll costs and have not yet filed a 2020 return, fill it out and compute the value.) If this amount is over $100,000, reduce it to $100,000. If both your net profit and gross income are zero or less, you are not eligible for a PPP loan.
  • Step 2: Calculate the average monthly net profit or gross income amount (divide the amount from Step 1 by 12).
  • Step 3: Multiply the average monthly net profit or gross income amount from Step 2 by 2.5 (or 3.5 if the loan is a 2^nd draw for a borrower with an NAICS code beginning with 72. This amount cannot exceed $20,833 (or $29,167 if the loan is a 2^nd draw for a borrower with an NAICS code beginning with 72).
  • Step 4: 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. Do not include the amount of any advance under an EIDL COVID19 loan (because it does not have to be repaid).
• The new loan calculation for Schedule C filers *with* employees:
  • Step 1: Compute 2019 or 2020 payroll (using the same year for all items) by adding the following:
    • at your election, either
      • (1) the net profit amount from line 31 of your 2019 or 2020 IRS Form 1040, Schedule C, or
      • (2) your 2019 or 2020 gross income minus employee payroll costs, calculated as Schedule C, line 7, minus your employee payroll costs reported on lines 14, 19, and 26 of Schedule C (for either option, if you are using 2020 amounts and have not yet filed a 2020 return, fill it out and compute the value). This amount is limited to $100,000;
    • Plus 2019 or 2020 gross wages and tips paid to your employees whose principal place of residence is in the United States, computed using 2019 or 2020 IRS Form 941 Taxable Medicare wages & tips (line 5c, Column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; (limited to $100,000 per employee);
    • Plus 2019 or 2020 employer contributions to employee group health, life, disability, vision and dental insurance (portion of IRS Form 1040, Schedule C line 14 attributable to those contributions); retirement contributions (IRS Form 1040, Schedule C, line 19); and state and local unemployment taxes.
  • Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).
  • Step 3: Multiply the average monthly amount from Step 2 by 2.5 (limited to $2,000,000 for 2^nd draw borrowers).
  • Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).
• Documentation required to be submitted with the loan application:
  • 2019 or 2020 Schedule C (whichever is used to calculate the loan)
  • 2019 or 2020 1099-MISC, invoice, bank statement, or book of recorded that establishes you are self-employed.
  • 2020 invoice, bank statement, or book of record to establish you were in operation on or around 2/15/2020.
  • Quarterly 2019 or 2020 Form 941s and quarterly state unemployment returns if you have employees.
  • Evidence of any retirement and health insurance contributions if you have employees.
  • Payroll statement or similar document from the pay period that covered 2/15/20 to establish you were in operation on that date.
• Certification of necessity: If total gross income on Schedule C is less than $150,000, the borrower will automatically be deemed to have made the required certification regarding the necessity of the loan request in good faith. However, if gross income is greater than $150,000, the borrower may be subject to a review by SBA in order to certify the loan was necessary.
• Using the funds: Generally, Schedule C filers can use the funds for the same expenses as everyone else. A couple key differences do exist, though—
  • Owner compensation replacement is limited to $20,833 and is calculated using 2019 or 2020
  • Mortgage interest, business rent payments, and business utility payments are eligible expenses but only if the borrower claimed or was entitled to claim a deduction for the expenses on his 2019 or 2020 Schedule C. For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 or 2020 IRS Form 1040, Schedule C, you cannot use the proceeds for utilities.

These rules apply to 1^st and 2^nd draw PPP loans. As of today, the government has not extended the due date for the applications; therefore, you’ll want to make sure you get your application submitted by the current March 31 deadline. As always, please reach out with any questions you have!