In advance of the April 10 opening of applications for the Small Business Association’s Paycheck Protection Program loans, I hosted a webinar to help freelancers, independent contractors, and gig workers understand the facts about the SBA’s COVID-19 small business loans as they apply to self-employed workers.
You can view and download the presentation slides here.
You can also download my short guide to these programs below.
The Treasury Department finally released some guidance for self-employed business owners regarding how to calculate “payroll” costs if you have no employees and what is eligible for forgiveness. The full guidance is here, but here are the highlights:
Your loan eligibility is based on your 2019 net income from self-employment. If you’ve filed a tax return for 2019, that number can be found on line 31 of your Schedule C. If you haven’t filed yet, you’ll need to fill out a draft Schedule C and submit it with your application (you don’t need to complete the full tax return). To calculate your maximum loan amount, divide the number on line 31 (or $100,000; whichever is less) by 12 and multiply it by 2.5.
If you started your business between January 1, 2020 and February 15, 2020, you will need to wait for further guidance to find out how to apply for your loan.
Loan use and forgiveness
The good news is that “owner compensation replacement” (i.e. paying yourself) is an eligible payroll expense for self-employed people with no employees. The bad news is that only 8 weeks’ equivalent of net profit is eligible for forgiveness. Using the same net income from self-employment number as above, divide that by 52 and multiply by 8, and that’s the amount that is eligible to be forgiven as payroll costs.
If you have mortgage, lease, or utility payments, you can still use up to 25% of the loan proceeds on those on top of the 8 weeks of owner compensation replacement. However, you need to have taken a deduction for those expenses in 2019 in order to be eligible – for example, if you signed a lease for office space in January 2020, it’s not an eligible expense for your PPP loan.
It’s therefore possible that, if you apply for the maximum amount that you’re eligible to borrow, you will eventually have to repay part of it. If you want the entire loan amount to be forgivable, only apply for the forgivable amount you are eligible for: 8 weeks of equivalent owner compensation replacement plus any mortgage, lease, or utility payments paid by your business.
As I stressed in the video, it’s important to keep really good records to show you have used the loan proceeds for eligible purposes.
Is there any money left?
It’s being reported today that the original $350 billion given to the Paycheck Protection Program has already been fully allocated – that is to say, it’s out of money. Congress is almost certain to put more money into the program, however, so if your loan hasn’t been approved or funded yet you should still try to apply. See the video for suggestions on how and where to apply for the PPP and EIDL programs!
Economic Injury Disaster Loans: not as advertised
The EIDL program, though less well-known than PPP, has somehow been even more dysfunctional in its rollout. Despite the advertised nonrepayable $10,000 “emergency grant” to be paid out within 3 days of applying for the program, as of the end of last week few people had seen any loan proceeds.
According to an email sent by the SBA this week, emergency grant payments are now capped at $1,000 per employee. Some funds have been distributed, but the program is lagging far behind its promise of quick aid to businesses in need. As of this posting, the SBA is no longer even accepting EIDL applications.
It was always far-fetched to imagine that the government would back up a $10,000 dump truck of free money to anyone who bothered to apply, but in this case the CARES Act did a poor job of clarifying what this money was really for while the SBA did not manage public expectations for how quickly they would have it in hand. As always, remember that if it sounds to good to be true…it usually is.