Congressional Research Service IN11341 (SBA’s Paycheck Protection Program (PPP) Loans and Self-Employed Individuals)

Summary

CRS Insight IN11341, SBA's Paycheck Protection Program (PPP) Loans and Self-Employed Individuals, by Sean Lowry, Analyst in Public Finance, dated April 16, 2020. It describes how the PPP, created by the CARES Act (P.L. 116-136), applies to self-employed individuals under the Interim Final Rule (IFR) SBA issued on April 14, 2020. Self-employed individuals may apply if they were in operation on February 15, 2020, had self-employment income, have their principal residence in the United States, and have filed or will file a 2019 Form 1040 Schedule C. The Insight notes that SBA is to issue additional guidance for those not in operation in 2019, and goes on to address partners.

Summary drafted by a model from the document's text below and checked by script against that text before publication. It is a navigation aid, not a reading of what the document proves. Where AI is used

Full text

INSIGHTi

SBA’s Paycheck Protection Program (PPP)
Loans and Self-Employed Individuals

Sean Lowry
Analyst in Public Finance

April 16, 2020
To provide short-term, economic relief to certain small businesses and nonprofits, the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act; P.L. 116-136) created the Small Business
Administration’s (SBA’s) Paycheck Protection Program (PPP).
On April 14, 2020, SBA issued an Interim Final Rule (IFR) detailing how the PPP will be applied in the
case of self-employed individuals (e.g., sole proprietors and partnerships, with and without employees,
and independent contractors). The IFR supplements SBA’s previously issued PPP rules and guidance that
have been coordinated with the Department of the Treasury. This Insight describes PPP-related statutes,
regulations, and guidance that apply to self-employed individuals.

Eligibility
In addition to the general PPP eligibility criteria, self-employed individuals can apply for a PPP loan if
(1) they were in operation on February 15, 2020;
(2) they had self-employment income (e.g., an independent contractor or a sole proprietor);
(3) their principal place of residence is in the United States; and
(4) they have filed or will file a 2019 Form 1040 Schedule C.
SBA is to issue additional guidance for those individuals with self-employment income who (1) were not
in operation in 2019 but were in operation on February 15, 2020, and (2) will file a Form 1040 Schedule
C for 2020.
Partners may not file separate PPP loan applications for themselves. Instead, the self-employment income
of “general active partners” may be reported as a payroll cost, up to $100,000 annualized per person on a
Congressional Research Service
7-....
www.crs.gov
IN11341

CRS INSIGHT
Prepared for Members and
Committees of Congress
Congressional Research Service 2

PPP loan application filed by or on behalf of the partnership. The April 14 IFR does not define a “general
active partner,” but this term could be intended to distinguish between those who actively participate in
the day-to-day management and business activities compared to a limited partner, who does not. Further,
the April 14 IFR does not define “self-employment income” of general active partners with precise
references to lines on partnership tax forms. Some tax practitioners have commented that partners should
include the amount listed on line 14 (“Self-employment earnings”) of their Schedule K-1, Form 1065 for
the purposes of “payroll costs.” Further guidance might be needed.
As per regulations, independent contractors are not included in the PPP loans of other businesses (e.g.,
their clients or the business that provides them with work). Independent contractors must file their own
PPP application. Additionally, self-employed individuals with more than one eligible business must roll
all of their expenses into a single PPP loan application.

Loan Amount Calculation
Step 1 in the PPP loan calculation depends on whether or not the self-employed individual has employees.
 For self-employed individuals with no employees, take the 2019 IRS Form 1040 Schedule
C line 31 net profit amount (even if the individual has not yet filed a 2019 return, they
must fill it out and compute the value). If this amount is over $100,000, reduce it to
$100,000.
 For self-employed individuals with employees, compute 2019 payroll costs by adding
2019 IRS Form 1040 Schedule C line 31 net profit amount (up to $100,000 annualized),
plus certain forms of employee compensation detailed in the April 14 IFR (pp. 7-8).
After Step 1, the remaining steps are the same for all self-employed individuals:
 Step 2: Divide the amount from Step 1 by 12 to determine the average monthly amount.
 Step 3: Multiply the average monthly amount from Step 2 by 2.5. This amount cannot
exceed $10 million.
 Step 4: If applicable, add the outstanding amount of any SBA Economic Injury Disaster
Loan (EIDL) made between January 31, 2020, and April 3, 2020, to be refinanced, less
the amount of any advance under an EIDL COVID-19 loan (because the advance does
not have to be repaid).

Use of PPP Loan Proceeds
PPP loan amounts can be used for “owner compensation replacement,” calculated based on the 2019 net
profit and the other allowable uses listed in the CARES Act (e.g., employee payroll costs, and certain
business expenses). The April 14 IFR (p. 10) limits self-employed individuals to using their PPP loans
only for types of allowable uses for which the borrower made expenditures in 2019. This includes up to
$100,000 of annualized pay per employee and for the self-employed business owner for eight weeks (a
maximum of $15,385 per individual). Owner compensation replacement for self-employed individuals is
based on the amount they paid themselves in 2019.
Under earlier regulations still in force, if the borrower wants the maximum amount of loan forgiveness
available, then no more than 25% of the loan amount can be used for non-“payroll costs.”
Congressional Research Service 3

PPP Loan Forgiveness
Up to eight weeks’ worth of eligible expenses, including principal and accrued interest, can be forgiven.
By regulation, payments on interest and principal are deferred for the first six months of the loan, though.
Thus, PPP borrowers might not have to make any payments before applying for forgiveness.
For self-employed individuals with no employees, the April 14 IFR (pp. 12-13) limits forgivable expenses
of owner compensation replacement to eight weeks of their 2019 average net profit calculation (described
in Step 1, above, under “Loan Amount Calculation”), or a maximum of $15,385. The April 14 IFR (pp.
13-14) contains more information on the documents that the borrower must provide to substantiate their
application for forgiveness.
For self-employed individuals with employees, the two-part formulas specified in the CARES Act
determine whether the amount of forgiveness will be reduced. Broadly speaking, these formulas reduce
the amount to be forgiven if the business does not maintain employment or salaries at certain levels.
Specifically, if the business (1) does not maintain at least the same number of full-time equivalent
employees during defined time periods; or (2) decreases salaries and wages by more than 25% for any
employee that makes less than $100,000 annualized in 2019 during the eight-week period after the loan’s
origination date, then the forgiven amount is reduced. For any amounts not forgiven, the terms of the loan
are 1% interest rate for a term of two years.
There is ambiguous and potentially contradictory language in the April 14 IFR (for example, see p. 12) as
to whether forgiveness for self-employed individuals is limited solely based on owner compensation
replacement or whether it can include nonpayroll costs. This could potentially be a drafting error, as it
would imply that self-employed individuals could not claim forgiveness for expenses related to employee
compensation, rent, utilities, etc.
As of the publication date of this Insight, SBA has not provided detailed guidance on how the PPP
forgiveness process will work. According to the CARES Act, borrowers must apply to their lender for
forgiveness and provide documentation substantiating their actual expenses during the eight-week period
after disbursement of their PPP loan. They must also certify that they used the loan proceeds only for
eligible purposes. The SBA Administrator may issue further regulations on documentation requirements.
The CARES Act requires lenders to issue a decision no later than 60 days after receiving an application
for loan forgiveness. The SBA Administrator is required to remit to the lender an amount equal to the
forgiveness, plus any interest accrued through the date of payment not later than 90 days after the date on
which the forgiveness amount is determined.
Under the CARES Act, forgiven loan amounts are not to be included in the borrower’s taxable
gross income. Otherwise, this type of “cancellation of indebtedness income” would be subject to
income tax.

IN11341 · VERSION 1 · NEW
EveryCRSReport.com

The Congressional Research Service (CRS) is a federal legislative branch agency, housed inside the
Library of Congress, charged with providing the United States Congress non-partisan advice on
issues that may come before Congress.

EveryCRSReport.com republishes CRS reports that are available to all Congressional staff. The
reports are not classified, and Members of Congress routinely make individual reports available to
the public.

Prior to our republication, we redacted phone numbers and email addresses of analysts who
produced the reports. We also added this page to the report. We have not intentionally made any
other changes to any report published on EveryCRSReport.com.

CRS reports, as a work of the United States government, are not subject to copyright protection in
the United States. Any CRS report may be reproduced and distributed in its entirety without
permission from CRS. However, as a CRS report may include copyrighted images or material from a
third party, you may need to obtain permission of the copyright holder if you wish to copy or
otherwise use copyrighted material.

Information in a CRS report should not be relied upon for purposes other than public
understanding of information that has been provided by CRS to members of Congress in
connection with CRS' institutional role.

EveryCRSReport.com is not a government website and is not affiliated with CRS. We do not claim
copyright on any CRS report we have republished.

File and source

File: IN11341.622487.pdf
Size: 599,129 bytes
SHA-256: 587bd62770dcb1676f8d3a6c62079725222bb9e015d53ad270a637eafb4b9cc8
Our copy: IN11341.622487.pdf
Original: www.everycrsreport.com