On April 10th, independent contractors and self-employed individuals will be eligible to apply for the CARES Act Paycheck Protection Program (PPP) loan. The loan program is designed to provide a direct incentive for small businesses to keep their workers on the payroll. Amounts loaned under the PPP may be eligible for forgiveness based upon consistency of employee headcount and compensation levels subsequent to the loan being granted and the use of the funds on eligible expenses. Eligible uses for the loan proceeds include payroll and related benefits, rent, mortgage interest, or utilities. The loan has a maturity of 2 years and an interest rate of 1%, with payments being deferred for 6 months.
Given that the PPP will be rolled-out to millions more individuals in just two days, surprisingly little is known about the loan amount formula, support documents, or forgiveness calculation. To help you gain a modicum of control, we’re sharing our best educated guesses and advice along with our promise to provide the very latest information as it is disseminated from the SBA.
Calculation of Loan Amount
If your business has payroll, in general, the loan amount is calculated based upon your average monthly payroll costs, computed by averaging these costs over a 12-month period. Payroll costs include cash compensation up to $100,000 per employee, employee health and retirement benefits, and state and local taxes assessed on compensation of employees. Average monthly payroll costs are multiplied by 2.5 to determine the eligible loan amount.
Unfortunately for independent contractors and self-employed individuals, the calculation of the loan amount can be more difficult, specifically if they do not have payroll. For self-employed individuals that do not have payroll, there are currently two schools of thought on how the average payroll cost could be calculated:
• The average monthly payroll cost calculation will be based on the Schedule C net profit (Line 31) up to $100,000 plus self-employed health insurance (Schedule 1 Line 16) and the Self-employed SEP, SIMPLE and qualified plan deductions (Schedule 1 Line 15).
• The average monthly payroll cost calculation will be based on the 1099 income received over a 12-month period, up to $100,000, plus self-employed health insurance (Schedule 1 Line 16) and the Self-employed SEP, SIMPLE and qualified plan deductions (Schedule 1 Line 15).
Support for Loan Application
We believe that the supporting documents that most banks will request to support a PPP application from independent contractors and self-employed individuals will consist of:
• IRS Form 940 and 941’s for 2019 (if a business has payroll)
• A payroll summary report for the 12-month period used to calculate the average monthly payroll, as well as for the payroll period closest to February 15, 2020 to establish you were operational on that date (if a business has payroll)
• 1099’s received for the 12-month period used to calculate the average monthly payroll (if you are an independent contractor)
• Documentation to support the health insurance premiums that you paid for the 12-month period used to calculate average monthly payroll
• Documentation to support the retirement benefit costs that you paid for the 12-month period used to calculate average monthly payroll
• Trailing 12-month Profit and Loss Statement (as of the date of application) month by month
• Most recent mortgage statement or rent statement (lease) for the period evidencing you were operational on February 15, 2020
• Utility bills for the period evidencing you were operational on February 15, 2020 (electric, gas, telephone, internet, water)
• Some banks may also request copies of tax returns and other financial information, yet to be determined
• Copies of driver’s licenses for any borrowers
Forgiveness of Loan Amount
In general, forgiveness of loans under the PPP will be determined over an 8-week period following the loan being granted and is based upon the use of the loan proceeds for payroll costs as well as rent, mortgage interest, and utilities. However, not more than 25% of the loan forgiveness may be attributable to non-payroll costs. The amount eligible for forgiveness is subject to adjustment based upon reduction in employee headcount and compensation levels.
Similar to the complexities with calculating the original loan amount, the application of the forgiveness criteria could be more difficult for independent contractors and self-employed individuals as well. For self-employed businesses that do not have payroll, there is currently no guidance on how eligible loan forgiveness will be calculated.
We know this leaves a lot to be desired in terms of feeling buttoned-up and ready to file, but we hope that this additional information gives independent contractors and self-employed individuals some idea of what to expect leading up to the filing of your PPP application. If the LGA Cares Team can be of any further assistance to you, please reach out to email@example.com and someone will contact you just as soon as possible.
by Tim Cammett, CPA Manager, Tax and Matthew W. Touma, CPA, MSA Principal