UPDATE as of May 14, 2020: The Small Business Administration (SBA) issued updated guidance on borrowers’ required good-faith certification and loan increases. Click here to read more.

The U.S. Small Business Administration (SBA), in consultation with the Department of the Treasury, has provided guidance to help different business entities calculate their payroll to determine the maximum amount of a Paycheck Protection Program (PPP) loan businesses can apply for.

The U.S. government will not challenge lender actions that conform to this guidance and to the PPP Interim Final Rules or any subsequent rulemaking in effect at the time.

You can click on any entity type in the list below to go directly to that summary (direct link feature may not work on mobile devices):

• Self-employed with no employees
• Self-employed with employees
• Self-employed individuals who report income on IRS Form 1040 Schedule F
• Partnerships
• S corporations and C corporations
• Nonprofits
• Nonprofit religious institutions, veterans’ organizations and tribal businesses

Ericksen Krentel continues to monitor the ever-changing guidance and requirements for the PPP loan application and debt forgiveness process to ensure you receive the maximum benefits. Our team is ready to help create a customized approach for your organization to effectively, and correctly, use those funds to guarantee maximum forgiveness. If you received PPP funds and need assistance in allocation and forgiveness documentation or calculation, please contact us by clicking here.

Note: PPP loan forgiveness amounts will depend, in part, on the total amount spent during the eight-week period following the first disbursement of the PPP loan.

All entities discussed in this article – except partnerships and self-employed individuals with no employees – should use the following methodology to calculate the maximum amount that can be borrowed: 

1. Compute your 2019 payroll costs by adding the following:
   • 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value); if this amount is more than $100,000, reduce it to $100,000; if this amount is less than zero, set this amount at zero;
   • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, which can be computed using 2019 IRS Form 941 Taxable Medicare wages and 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 and tips, subtracting any amount paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is outside the U.S;
   • 2019 employer contributions for employee health insurance (portion of IRS Form 1040 Schedule C line 14 attributable to health insurance);
   • 2019 employer contributions to employee retirement plans (IRS Form 1040 Schedule C line 19); and
   • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms).
2. Calculate the average monthly payroll costs amount (divide the amount from Step 1 by 12).
3. Multiply the average monthly payroll costs amount from Step 2 by 2.5.
4. Add the outstanding amount of any 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 (because it does not have to be repaid).

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Self-employed with no employees

The following methodology should be if you are self-employed and have no employees, and your principal place of residence is in the United States, including independent contractors or those who operate a sole proprietorship (but not partners in a partnership):

1. Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount (if you have not yet filed a 2019 return, fill it out and compute the value). If this amount is more than $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.
2. Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).
3. Multiply the average monthly net profit amount from Step 2 by 2.5.
4. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Your 2019 IRS Form 1040 Schedule C must be provided to substantiate the applied-for PPP loan amount. You must also provide a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement or book of record establishing you were self-employed in 2019 and a 2020 invoice, bank statement or book of record establishing you were in operation on February 15, 2020.
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Self-employed with employees

This includes independent contractors or those who operate a sole proprietorship (but not partners in a partnership):

To substantiate the applied-for PPP loan, you must provide your:

• 2019 IRS Form 1040 Schedule C;
• IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements);
• any other documentation of any retirement or health insurance contributions; and
• a payroll statement or similar documentation from the pay period that covered February 15, 2020, to establish you were in operation and had employees on that date.

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I am a self-employed individual who reports my income on IRS Form 1040 Schedule F. What documentation must I provide in place of Schedule C, and how should my maximum loan amount be determined?

Self-employed farmers (i.e., those who report their net farm profit on IRS Form 1040 Schedule 1 and Schedule F) should use IRS Form 1040 Schedule F in lieu of Schedule C, and Schedule F line 34 net farm profit should be used to determine their loan amount in place of Schedule C line 31 net profit. The calculation is otherwise the same as for Schedule C filers above. The 2019 IRS Form 1040 Schedule 1 and Schedule F must be included with the loan application.
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Partnerships

The following methodology should be for partnerships (partners’ self-employment income should be included on the partnership’s PPP loan application; individual partners may not apply for separate PPP loans):

1. Compute 2019 payroll costs by adding the following:
   • 2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment of individual U.S. based general partners that are subject to self-employment tax, computed from box 14a (reduced by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties) multiplied by 0.9235, 2 up to $100,000 per partner (if 2019 schedules have not been filed, fill them out);
   • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, if any, which can be computed using 2019 IRS Form 941 taxable Medicare wages and 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 and tips, subtracting any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is outside the U.S;
   • 2019 employer contributions for employee health insurance, if any (portion of IRS Form 1065 line 19 attributable to health insurance);
   • 2019 employer contributions to employee retirement plans, if any (IRS Form 1065 line 18); and
   • 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms), if any.
2. Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).
3. Multiply the average monthly payroll costs from Step 2 by 2.5.
4. Add any outstanding amount of any EIDL made between January 31, 2020, and April 3, 2020, you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

To substantiate the applied-for PPP loan, you must provide:

• The partnership’s 2019 IRS Form 1065 (including K-1s) and other relevant supporting documentation if the partnership has employees, including:
  • 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements);
  • any other records of any retirement or health insurance contributions; and
  • a payroll statement or similar documentation from the pay period that covered February 15, 2020, to establish you were in operation and had employees on that date.

If the partnership has no employees, you must provide an invoice, bank statement or book of record establishing the partnership was in operation on February 15, 2020.
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S corporations and C corporations

To substantiate the applied-for PPP loan, you must provide:

• 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements);
• filed business tax return (IRS Form 1120 or IRS 1120-S) or other documentation of any retirement and health insurance contributions; and
• a payroll statement or similar documentation from the pay period that covered February 15, 2020, to establish you were in operation and had employees on that date.

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Nonprofits

To substantiate the applied-for PPP loan, you must provide:

• 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements);
• filed IRS Form 990 Part IX or other documentation of any retirement and health insurance contributions; and
• a payroll statement or similar documentation from the pay period that covered February 15, 2020, to establish you were in operation and had employees on that date.

Eligible nonprofits that do not file an IRS Form 990, typically those with gross receipts less than $50,000, should see the next question.
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Nonprofit religious institutions, veterans’ organizations and tribal businesses

To substantiate the applied-for PPP loan, you must provide:

• 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements);
• any documentation of any retirement and health insurance contributions; and
• a payroll statement or similar documentation from the pay period that covered February 15, 2020, to establish you were in operation and had employees on that date.

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Which set of instructions apply to LLC owners?

LLCs should follow the instructions that apply to their tax filing situation, for example, whether they file as a sole proprietor, a partnership or a corporation.
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What other documentation can be provided to substantiate the applied-for PPP loan amount?

IRS Form W-2s and IRS Form W-3 or payroll processor reports, including quarterly and annual tax reports, can be used in place of IRS Form 941. Additionally, small businesses that file an annual IRS Form 944 instead of quarterly IRS Form 941 should rely on and provide IRS Form 944.

Similarly, records from a retirement administrator can be used to document employer retirement contributions, while records from a health insurance company or third-party administrator for a self-insured plan can document employer health insurance contributions.
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As requirements and guidance change, Ericksen Krentel professionals are available to help you. As questions or concerns arise, we ask that you contact us so we can address them as quickly as possible to ensure we continue to meet your needs. As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or monitoring our accounts on LinkedIn, Twitter or Facebook.

About Ericksen Krentel

Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.

That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.

Learn more at www.ericksenkrentel.com.

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