By Robert T. Smith and Katherine C. Campbell
The Small Business Administration (SBA) recently released a supplement to the Interim Final Rule issued on April 3, 2020, along with an update to its Frequently Asked Questions. The supplemental rule provides guidance for self-employed individuals as well as addressing certain eligibility requirements. This alert contains a review of several pertinent points in the rule and updated FAQs.
Eligibility of Self-Employed Persons
A self-employed person is eligible for a PPP loan if he or she (i) was operating on February 15, 2020, (ii) is a individual with self-employment income, (iii) has a principal place of business in the US, and (iv) filed or will file a Form 1040 Schedule C for 2019.
PPP Applications by Partner and Partnership
Surprisingly, the rule provides that an individual (or, presumably also, a single member LLC) may not file a PPP application in its capacity as a partner in a partnership where the partnership is also filing an application. The rule states that the partnership should include the partner’s self-employment income (or basically its pass-through income from the partnership) as “payroll costs” of the partnership.
Self-Employed Persons With No 2019 Operations
SBA indicates that it will issue additional guidance for self-employed persons that were not in operation in 2019.
Maximum Loan Amount
The maximum loan amount for a self-employed person without employees begins with Schedule C net profit – capped at $100,000 – with that amount being divided by 12 to determine average monthly net profit.
The maximum loan amount for a self-employed person with employees will also include 2019 “wages and tips paid to employees."
Documents Needed to Apply For a PPP Loan
The following documents should be provided by self-employed individuals:
- 2019 Form 1040 Schedule C;
- 2019 Form 1099-MISC detailing nonemployee compensation received (box 7);
- Invoice, bank statement, or book of record that establishes you are self-employed;
- 2019 Form 941 (or other tax forms or equivalent payroll processor records for containing similar information), if you have employees;
- State quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records;
- Evidence of any retirement and health insurance contributions, if applicable; and
- A payroll statement or similar documentation from the pay period that covered February 15, 2020 that establishes you were in operation on February 15, 2020
If you have not filed a 2019 tax return with the IRS, you must fill out Schedule C and provide it to the lender.
Use of Loan Funds
A PPP loan to a self-employed person may be used for “owner compensation replacement”, which is essentially eight weeks (or 8/52) of 2019 net profit - in addition to employee payroll costs, mortgage interest payments, rents and utilities. At least 75 percent of funds must be applied to owner compensation replacement and employee payroll costs.
The rule clarifies that rent and interest payments may relate to personal property leased/financed by the sole proprietor. A self-employed person may not use the loan for utilities or rent if it did not pay those same costs in 2019.
Additionally, loan proceeds may be used to refinance an EIDL loan made from January 31, 2020, through April 3, 2020.
The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest.
The rule lists the following documents that a self-employed person must submit to request forgiveness: form 941, state quarterly wage unemployment insurance tax reporting forms, or equivalent payroll processor records corresponding to the covered period, evidence of business rent, mortgage interest (real and personal), and utility payments.
Loans to Businesses Owned by Bank Directors
Despite statements last week that loans to bank “insiders” were not permitted under the PPP, the supplemental rule provides that bank can make loans to a business owned by (i) a director of the bank, or (ii) an owner of less than 30 percent equity in the bank. However, the rule prohibits loans to any officer or key employee of the lender. Officers and key employees will be required to obtain a PPP loan from a different lender.
Beginning of eight-week period
The FAQ clarifies that the eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower.
Do lenders need a separate SBA Authorization document to issue PPP loans?
No, however, lenders must have executed SBA Form 2484, which may then be retained in the lender’s file.
How do the $10 million cap and affiliation rules work for hotels and restaurants?
Under the CARES Act, any single business entity that is assigned a NAICS code beginning with 72 (including hotels and restaurants) and that employs not more than 500 employees per physical location is eligible to receive a PPP loan. In addition, SBA's affiliation rules do not apply to any business entity that is assigned a NAICS code beginning with 72 and that employs not more than 500 employees. This means that where each restaurant or hotel location owned by a parent business is a separate legal business entity, then each location that employs not more than 500 employees may apply for a separate PPP loan provided it uses a unique EIN.
Do the information lenders are required to collect from PPP applicants regarding every owner who has a 20 percent or greater ownership stake satisfy a lender's obligations to collect information under the Bank Secrecy Act?
If every owner who has a 20 percent or greater ownership stake is an individual, then the lender will simply need to ensure that it has the individual’s name and title (if any), ownership percentage, SSN, address and date of birth. If a 20 percent owner is an entity, the lender will need to collect the appropriate beneficial ownership information for that entity. If the applicant is an existing bank customer and the lender has previously verified the necessary information, the lender does not have to re-verify the information.
Robert T. Smith heads the Finance and Commercial Transactions Practice Group. His diverse corporate practice focuses on representing companies and financial institutions in general business, transactional, securities and regulatory matters.
Katherine C. Campbell is an associate in the Litigation Practice Group at Friday, Eldredge & Clark. She serves as litigation counsel for individuals and businesses in complex business and commercial disputes including employment claims, collective action wage and hour claims, and breach of contract matters.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.