Let's get the legal stuff out of the way - this is intended to help you decide if you can/should apply for the PPP loan, but I am not a CPA, I am not guaranteeing the accuracy of this information, and this shouldn't be used in place of advice from a qualified professional. You are responsible for determining your eligibility and the accuracy of the information that you submit.
The CARES Act allocated $349B for the Payroll Protection Program - a program that provides small business loans including loans to self-employed individuals (e.g., independent contractors) that have been economically impacted by the effects of COVID-19. Congress passed a bill that adds an additional $310B to the PPP program.
Key Details About the PPP Loan
- two year term
- 1% annual interest rate
- part or all of the loan may qualify for forgiveness
- no payments required for the first six months (interest still accrues)
Lenders started accepting applications from self-employed individuals on 4/10/20, but the language was primarily written for small businesses, so there were outstanding questions about how it applied to self-employed individuals. On 4/14/20, the SBA and Treasury provided clarification and guidance for people that are self-employed.
Based on your situation and needs, there are multiple options for economic assistance that you may want to consider. I will be focusing on the PPP loans. Keep in mind that using any one form of assistance may impact your ability to use others. If you look at the EIDL loan information, you will notice that it states that applicants may receive up to $10k as a grant even if they don't qualify or accept the EIDL loan. Recently there was clarification that the max grant is $1k/employee and a max of $10k, so my understanding is that in most common cases, someone that is self-employed will receive $1k.
The rest of this guide assumes that you are filing as an independent contractor or sole proprietor that doesn't employ other people. My goal is to help anyone that has questions get started, but this doesn't cover every scenario, so you may want to review the guidance (linked above) for additional information.
Do I Qualify?
To qualify for the PPP loan, you must:
- file a Form 1040 Schedule C and have income from self-employment
- be in business on 2/15/20
- have filed or will file your Form 1040 Schedule C for 2019
- have a principal residence in the US
- have a net profit on your 2019 1040 Schedule C (line item 31 [Net Profit or (loss)] > $0)
and must not:
- be engaged in illegal activity
- be incarcerated, on parole or probation, have formal criminal charges brought against you, or are/have been a convicted felon within the last five years
- have any delinquent loans obtained through the SBA or any other Federal agency or defaulted on any loans in the last seven years that caused a loss to the government
If you weren't able to meet the criteria of this list, you may want to discuss your eligibility with a professional.
The Bank Account Hurdle
The most common scenario for applying for the loan is through a bank with which you already have an existing relationship, but there are some hurdles to discuss.
Currently, banking institutions that were already set up to offer SBA 7(a) loans are the the ones that offer the PPP loans. The banks that I checked are requiring that you have a business checking account set up prior to 2/15/20 to apply for the PPP loan. I have seen many frustrated self-employed people voicing concerns about this restriction since they are using a personal bank account. If you don't have a business checking account set up with a bank that is offering PPP loans, you may have trouble finding a way to apply right now.
If you find banks that are allowing customers with personal accounts or new business checking account customers to apply, please let me know and I will update this article.
Non-banking institutions are also being set up to offer PPP loans, but the only one that I have seen so far that is ready is PayPal and I am not familiar with its criteria or requirements. QuickBooks is also preparing to offer PPP loans, but they haven't started yet.
How Much Can I Borrow
As stated above, this assumes you are self-employed and don't employ other people. If this scenario doesn't apply to you, there are other formulas in the additional guidance linked above.
To determine the maximum amount that you can borrow (you don't have apply for the maximum amount)
1. Take your net profit from line 31 of your 2019 1040 Schedule C (if this exceeds $100,000, use $100,000 since that is the maximum allowed)
2. Divide net profit by 12. This is your average monthly net profit.
3. Multiply your average monthly net profit by 2.5. This is your maximum loan amount.
*If you have an EIDL loan made between 1/31-4/3/20, you can roll the outstanding balance into your PPP loan by adding the remaining balance (less the advance that doesn't need to be repaid) to your maximum loan amount.*
What Are Qualified Uses for the Loan Proceeds
There are a few qualified uses for the proceeds including employee payroll costs, mortgage interest payments for business mortgage obligations, business rent payments, and more. The most common scenario is that the proceeds will be used for owner compensation replacement, so I am going to focus on that. If you think that you may have other expenses that qualify, you can find more information in the additional guidance provided by the Treasury and SBA.
There still seems to be some confusion about a requirement that 75% of the proceeds shall be used for payroll costs and how owner compensation replacement fits into that calculations, so I will update this once this is clarified.
What Is Eligible for Forgiveness
Similar to qualified uses, there is some confusion about what qualifies for forgiveness. So far it is looking like it will be either
1. an eight week proportion of net income from your 2019 1040 Schedule C. (i.e., Divide net income by 52 to get your weekly net income. Then, multiply your weekly net income by 8).
2. an eight week proportion of net income from 2019 1040 Schedule C + qualified costs for the eight week period from loan origination.
After this is clarified, I will update the article.
What Documents Do I Need
What documentation is requested may differ between lenders, but these should satisfy the requirements as stated in the additional guidance provided by the Treasury and SBA:
- 2019 Form 1040 Schedule C
- 2019 Form 1099-MISC (if you've misplaced this, we can provide another copy)
- 2020 invoice, bank statement, or book of record to establish you were in operation on or around 2/15/20. (If you decide to apply, we can provide you with a record)
For loan forgiveness:
- 2019 Form 1040 Schedule C
- if you are claiming other qualified expenses, documents that establish that the loan proceeds were used for that purpose. You can find more information about this in the clarification provided by the Treasury and SBA.
I hope this helps you get started. If you have any questions or comments, let us know.