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Schedule C Sole Proprietor? Here’s How to Calculate Income for PPP Loans

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With independent contractors and self-employed individuals becoming eligible to apply for U.S. Small Business Administration Paycheck Protection Program (PPP) loans Friday, April 10, 2020, the SBA issued an interim final rule on how Schedule C sole proprietors and individual partners in a partnership should treat their self-employment income regarding the PPP loan process.

This is the first actual guidance that has been issued on this topic.

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

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.

Ericksen Krentel has summarized the clarifications below:


Schedule C Sole Proprietor – With Employees

Add the sole proprietor’s 2019 Schedule C line 31 net profit, up to $100,000, to 2019 gross wages paid to employees (up to $100,000 max per employee) to calculate the gross earnings portion of the loan amount calculation. Employer paid health insurance premiums included in Schedule C line 14, retirement benefits included in Schedule C line 19 and unemployment taxes paid on employees are then added to the gross earnings for calculating average monthly payroll costs used in the loan amount calculations. 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. 

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 (because it does not have to be repaid).

You must supply your 2019 Form 1040 Schedule C, Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable.
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Schedule C Sole Proprietor – No Employees

Divide your 2019 Schedule C line 31 net profit, up to $100,000, by 12 to calculate average monthly payroll costs used in the loan amount calculations. The new guidance does not appear to allow health insurance premiums or retirement benefits paid for sole proprietors to be added to net income for calculating payroll costs. 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. 

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 (because it does not have to be repaid).

The new rules also state, “Regardless of whether you have filed a 2019 tax return with the IRS, you must provide the 2019 Form 1040 Schedule C with your PPP loan application to substantiate the applied-for PPP loan amount and a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed.”.

If you have income from self-employment and file a Form 1040, Schedule C, you are eligible for a PPP loan if:

  • you were in operation on February 15, 2020;
  • you are an individual with self-employment income (such as an independent contractor or a sole proprietor);
  • your principal place of residence is in the United States; and
  • you filed or will file a Form 1040 Schedule C for 2019.

The SBA will issue additional guidance for individuals with self-employment income who:

  • were not in operation in 2019 but who were in operation February 15, 2020, and
  • will file a Form 1040 Schedule C for 2020.

As a reminder, PPP loans are to be used for the following:

  • Owner compensation replacement, calculated based on 2019 net profit as described above.
  • Employee payroll costs for employees whose principal place of residence is in the United States, if you have employees. At least 75 percent of the PPP loan must be used for payroll costs.
  • Mortgage interest payments (but not mortgage prepayments or principal payments) on any business mortgage obligation on real or personal property (such as the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business), business rent payments (such as the warehouse where you store business equipment or the vehicle you use to perform your business) and business utility payments (such as the cost of electricity in the warehouse you rent or gas you use driving your business vehicle).

You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan.

For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the covered period.

  • Interest payments on any other debt obligations that were incurred before February 15, 2020 (such amounts are not eligible for PPP loan forgiveness).
  • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020 (maturity will be reset to PPP’s maturity of two years). If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

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Partners in a Partnership

They may not submit separate PPP loan applications as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.

The SBA determined that Rent, mortgage interest, utilities, and other debt service are generally

incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners.
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Other Notes

Be aware that securing a PPP loan may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by the Coronavirus, Aid, Relief and Economic Security Act (CARES) Act or CARES Act Employee Retention Credits.
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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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