PPP Loans and the Self-Employed: Schedule C and Schedule F

SBA issued an Interim Final Rule regarding the Paycheck Protection Program as it relates to the self-employed filing a Schedule C this week. Below is a summary of the guidance and we have also linked a copy of the Interim Final Rule here for reference.

Individuals with Self-Employment Income who File a Form 1040, Schedule C

You are eligible for a PPP Loan if:

  1. You were in operation on February 15, 2020.
  2. You are an individual with self-employment income (such as an independent contractor or sole proprietor)
  3. Your principal place of residence is in the US
  4. You filed or will file a Form 1040 Schedule C for 2019.

 

How to calculate the maximum amount of loan (businesses without employees):

Step 1:  Find the 2019 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 over $100,000, reduce it to $100,000.  If this amount is zero or less, you are not eligible for a PPP loan.

Step 2:  Calculate the average monthly net profit amount (divide the amount from Step 1 by 12)

Step 3:  Multiply the average monthly net profit amount from Step 2 by 2.5

Step 4:  Add the outstanding amount of any Economic Injury Disaster Loan made between 1/31/20 to 4/3/20 that you seek to refi.

The applicant must provide the 2019 Form 1040 Schedule C, 2019 1099-MISC showing non-employee comp, invoice, bank statements or books of record that establishes they are self-employed.  Applicants must also provide a 2020 income invoice, bank statement, or book of record to establish they were in operation on or around 2/15/20.

 

How to calculate the maximum amount of loan (businesses with employees):

Step 1:

  • Find the 2019 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 over $100,000, reduce it to $100,000.  If this amount is zero or less, set this amount at zero.
  • 2019 gross wages and tips paid to your employees using 2019 Form 941 taxable Medicare wages and tips from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare wages and tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized.
  • 2019 employer health insurance contributions (health insurance component of Schedule C line 14), retirement contributions (Schedule C line 19), and state and local taxes assessed on employee compensation (state unemployment). Note that owner self-employed health insurance and owner retirement contributions deducted on Schedule 1 are NOT factored into the calculation.

Step 2:  Calculate the average monthly amount (divide the amount from Step 1 by 12)

Step 3:  Multiply the average monthly amount from Step 2 by 2.5

Step 4:  Add the outstanding amount of any Economic Injury Disaster Loan made between 1/31/20 to 4/3/20 that you seek to refi

Applicant must provide 2019 Form 1040 Schedule C and Form 941’s and evidence supporting the health insurance and retirement contributions.

 

The Proceeds of the PPP loan are to be used for the following:

  1. Owner compensation replacement, calculated based on 2019 net profit as described above.
  2. Employee payroll costs (as described in first Interim Final Rule)
  3. Mortgage interest payments on any business mortgage obligation on real or personal property (NOTE: this is what the rule says but there is no such thing as a mortgage on personal property)
  4. Interest payments on any other debt obligations that were incurred before 2/15/20 but such amounts are not eligible for PPP loan forgiveness.
  5. Rent and Utilities

The use of loan proceeds is limited to those types of allowable uses for which the borrower made expenditures in 2019.  So, if the expense was not there in 2019 but is an expense for 2020, it may not be used.

 

What amounts shall be eligible for forgiveness:

  1. Payroll costs including salary, wages and tips up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual) as well as covered benefits for employees (but not owners).
  2. Owner compensation replacement calculated based on 2019 net profits as described above, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit.
  3. Payments of interest on mortgage obligations on real or personal property incurred before 2/15/20 to the extent deductible on Schedule C
  4. Rent payments on lease agreements in force before 2/15/20 to the extent deductible on Schedule C and utility payments under service agreements dated before 2/15/20.

75% of the amount forgiven must be attributable to payroll costs.

 

Other items to note in this new guidance:

  1. If the individual is a partner in a partnership, they may not submit a separate PPP loan application for themselves as a self-employed individual.  (This pertains to the PPP for the partnership, the individual may apply as self-employed if they have a separate Schedule C)
  2. Instead, the self-employment income of general active partners may be reported as payroll costs, up to $100,000 annualized on a PPP loan application filed by or on behalf of the partnership.
  3. SBA will issue additional guidance for those individuals with self-employment income who are:
    1. Not in operation in 2019 but who were in operation on 2/15/20, and
    2. Will file of Schedule C for 2020

 

Individuals with Self-Employment Income who File a Form 1040, Schedule F

In this Guidance issued on April 14th, it refers to Schedule C’s and not Schedule F.  Farmers tend to incur more gains on the sale of equipment reported on Form 4797 that is not reported on Schedule F.  Therefore, we may see additional guidance from SBA or perhaps the USDA if the PPP loan is calculated on “net farm income”, including these gains or on “net self-employment” income without these gains.

Please reach out to our team if you have questions on this new development. We are always here to help.

How to Check the Status of Your Stimulus Check

Stimulus checks have begun hitting bank accounts. While some taxpayers may have breathed a sigh of relief after checking their accounts this week, others may be left wondering where their payment is. The IRS has set up an online system taxpayers can use to check the status of their payment, if it will be mailed or direct deposited (and to where), and update banking information to receive the payment.

Click here to visit the IRS Get My Payment Portal.

 

Checking the Status of your Payment

In order to see when and how you will receive your stimulus payment, you will need the following information from your most recent tax filings:

  • the primary filer’s social security number
  • Date of birth
  • Street address
  • Zip code

 

Bank Account Information

Per the IRS website, “Get My Payment” can be used for taxpayers who did not use direct deposit on their last tax return to receive a refund, or when their direct deposit information was inaccurate and resulted in a refund check, and will be able to provide that information and speed their payment with a deposit into their bank account.  “Get My Payment” cannot update direct deposit bank account information after an Economic Impact Payment has been scheduled for delivery. To help protect against potential fraud, the IRS tool also does not allow people to change direct deposit bank account information already on file with the IRS.

You will need the following information from your most recent tax filings:

  • All of the information listed above
  • Adjusted Gross Income
  • Balance due or refund amount
  • Bank routing number
  • Bank account number

 

If you’re unsure if you will receive a stimulus payment, please see our article linked here regarding who is eligible to receive these payments and in what amount.

We are always here to help. Our team is closely monitoring updates as they are announced and will do our best to keep you informed. Please reach out to your dedicated Scheffel Boyle team member with questions.

IRS Extends More Tax Deadlines to Cover Individuals, Trusts, Estates, Corporations, and More

The IRS recently announced more extensions in response to the COVID-19 pandemic. In IRS Notice 2020-23, the new extensions now cover individuals, estates, corporations, and others.

It was just last month that the IRS extended the filing and payment deadline for federal income taxes. Normally due on April 15, taxpayers now have until July 15, 2020 to pay and file their federal returns with no late filing or payment penalties.

The new provisions in Notice 2020-23 were released on April 9, 2020 and offer expanded relief to more types of returns, tax payments, and other items. This notice extends a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020, including the second quarter estimated tax payment due June 15th.  In addition, it also suspends interest, additions to tax and penalties for late filing or late payment until July 15, 2020.

The new Notice includes extending the following filing and payment deadlines:

  • Individual income tax payments and return filings on Form 1040, U.S. Individual Income Tax Return, 1040-SR, U.S. Tax Return for Seniors, 1040-NR, U.S. Nonresident Alien Income Tax Return, 1040-NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents, 1040-PR, Self-Employment Tax Return – Puerto Rico, and 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico);
  • Calendar year or fiscal year corporate income tax payments and return filings on Form 1120, U.S. Corporation Income Tax Return, 1120-C, U.S. Income Tax Return for Cooperative Associations, 1120-F, U.S. Income Tax Return of a Foreign Corporation, 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation, 1120-H, U.S. Income Tax Return for Homeowners Associations, 1120-L, U.S. Life Insurance Company Income Tax Return, 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons, 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, 1120-POL, U.S. Income Tax Return for Certain Political Organizations, 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts, 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies, 1120-S, U.S. Income Tax Return for an S Corporation, and 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B);
  • Calendar year or fiscal year partnership return filings on Form 1065, U.S. Return of Partnership Income, and Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return;
  • Estate and trust income tax payments and return filings on Form 1041, U.S. Income Tax Return for Estates and Trusts, 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts, and 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts;
  • Estate and generation-skipping transfer tax payments and return filings on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, 706-NA, United States Estate (and Generation-Skipping Transfer) Tax Return, 706-A, United States Additional Estate Tax Return, 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts, 706-GS(T), Generation-Skipping Transfer Tax Return for Terminations, 706-GS(D), Generation-Skipping Transfer Tax Return for Distributions, and 706-GS(D-1), Notification of Distribution from a Generation-Skipping Trust (including the due date for providing such form to a beneficiary);
  • Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, filed pursuant to Revenue Procedure 2017-34;
  • Form 8971, Information Regarding Beneficiaries Acquiring Property from a Decedent and any supplemental Form 8971, including all requirements contained in section 6035(a) of the Code;
  • Gift and generation-skipping transfer tax payments and return filings on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return that are due on the date an estate is required to file Form 706 or Form 706-NA;
  • Estate tax payments of principal or interest due as a result of an election made under sections 6166, 6161, or 6163 and annual recertification requirements under section 6166 of the Code;
  • Exempt organization business income tax and other payments and return filings on Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e) of the Code);
  • Excise tax payments on investment income and return filings on Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, and excise tax payments and return filings on Form 4720, Return of Certain Excise Taxes under Chapters 41 and 42 of the Internal Revenue Code; and
  • Quarterly estimated income tax payments calculated on or submitted with Form 990-W, Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations, 1040-ES, Estimated Tax for Individuals, 1040-ES (NR), U.S. Estimated Tax for Nonresident Alien Individuals, 1040-ES (PR), Estimated Federal Tax on Self Employment Income and on Household Employees (Residents of Puerto Rico), 1041-ES, Estimated Income Tax for Estates and Trusts, and 1120-W, Estimated Tax for Corporations.

Receiving these extensions does not require any additional forms or documentation. There is no need to call the IRS or apply for these extensions. They are automatic.

The Notice also provides relief for 2016 unclaimed refunds, extending that deadline to July 15, 2020. In addition, it extended the time for filing and review of petitions in Tax Court.

We are here to help. Please contact our team for questions on these new regulations.

COVID-19 Business Relief Analysis

Within weeks, several new laws and programs offering Coronavirus relief have gone into effect. While these measures to protect those hit hardest by the pandemic are important, it can be a somewhat confusing process for individuals and businesses to decide which route is best for their situation, and for what they qualify. Information is updated daily and interpretations are continually changing.

To help our friends and clients, this chart breaks down comparative information about a few of the new laws and programs that have rolled out in response to the COVID-19 pandemic. It describes the Paycheck Protection Program, FFCRA Credits, Employee Retention Credit, Employer Payroll Tax Payment Deferral, and the CARES Act Unemployment Assistance.

Please contact our team if you need guidance, as we have additional tools internally to counsel our clients through this process. We are always here to help.

Click here for a PDF download of the COVID-19 Business Relief Analysis.

 

SBA Paycheck Protection Program Offers Coronavirus Relief

The Paycheck Protection Program (PPP) is part of “The Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) that was recently passed.  The PPP provides short-term cash flow assistance to small businesses to support their employees during this time of economic distress.  The PPP loans are provided by the SBA through their certified lenders guaranteed by the federal government. SBA will be guaranteeing these loans 100%, but due to sheer volume of need at this time, they are allowing banks to write the loans.

We can counsel our clients on two main issues regarding PPP loans:

  1. If you qualify, calculating the maximum borrowing amount
  2. If you qualify for forgiveness of the loans, calculating the forgiveness


Eligibility Period

PPP loans must be made for the period prior to June 30, 2020.


Eligible Businesses

PPP Eligible Businesses Include:

  • Businesses with less than 500 employees (full-time or part-time), operations as of February 15, 2020, and was substantially impacted by COVID-19
  • A business that otherwise meets the SBA’s size standard
  • A 501(c)(3) with fewer than 500 employees (full-time or part-time)
  • Sole Proprietors and independent contractors
  • A self-employed individual who regularly carries on any trade or business
  • A Tribal business concern that meets the SBA size standard
  • A 501(c)(19) Veterans Organization that meets the SBA size standard
  • Churches and faith-based organizations

Businesses not eligible include:

  • Cannabis companies
  • Casinos
  • Land developers
  • Any business involved in an illegal or prurient activity are not eligible per federal law

Affiliation rules of limiting to one entity are waived for this loan in certain industries.

Special Rules

  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

 

PPP Loan Funding

  • Loan amounts can be as large as 250% of the business’s average monthly payroll cost over the last 12 months not to exceed $10M
  • As well as salaries over $100,000 (annualized for each employee) not counted in this payroll calculation


Use of PPP Loans

The funds received under the PPP loan requirements must be for the following expenses:

  • Payroll (salaries, wages, vacation, parental, family, medical, or sick leave, severance, retirement benefits, and state or local taxes)
  • PPP funds cannot be used to pay salaries over $100,000
  • Costs for related group health care benefits
  • Employee commissions and tips
  • Interest on mortgage payments (not applicable for principle portion of payments) and on additional debt incurred prior to obtaining the loan
  • Rent and utilities

 

Certifications

An eligible recipient applying for a covered loan shall make a good faith certification:

  1. that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;
  2. acknowledging that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments;
  3. that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan; and
  4. during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.

 

Payment Forgiveness

The goal of PPP loans is to not reduce workforce and improve economic stability in the midst of the Coronavirus pandemic. Therefore, businesses who are continuing to retain and pay their staff during the pandemic will be eligible for certain levels of loan forgiveness.

It’s also important to note that those who qualify for PPP loan forgiveness will not be forced to report those amounts as income. However, the amount of loan forgiveness cannot exceed the principal amount of the loan

Businesses who may be eligible for payment forgiveness include:

  • Businesses who used the PPP loan for payroll costs as described above. Mortgage interest, rent, and utilities as described above must have been in effect as of February 15, 2020. All must be paid during the first 8 weeks from the origination date of the loan.
  • Businesses who keep their employees and pay at least 75% of their prior year compensation

The amount of forgiveness will be reduced by the comparison of current year and prior year Full-Time Equivalent (FTEs). Businesses must submit applicable supporting documentation to request the available loan forgiveness

Reductions in employment or wages that occur during the period beginning on February 15, 2020 and ending 30 days after enactment of the CARES Act, (as compared to February 15, 2020) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees or reduction in wages.

Due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll.

 

Payment Deferral

Payments on PPP loans can be deferred for 6 months up to one year.

 

PPP Loan Terms

  • No collateral or personal guarantee
  • Per SBA’s website on April 1, 2020, maturity of 2 years and an interest rate of .5%

 

How We Can Help

This is a trying and unprecedented time for business owners. Our team is utilizing our nationwide resources to update our clients and friends as these programs are interpreted and regulations are written. The COVID-19 pandemic and the regulatory news surrounding it are constantly evolving. We are closely monitoring these situations and will share timely and important news with you as it is released.

Please reach out to your dedicated Scheffel Boyle team member at any time for assistance. We are always here to help.