New Guidance for Self-Employed Persons Seeking Paycheck Protection Program Loans April 16, 2020

AG small, force majeureNew Guidance for Self Employed Persons Seeking Paycheck Protection Program Loans
By: Adam Glassman

Certain provisions of the CARES Act are intended to provide immediate assistance to businesses suffering from the economic shutdown during the COVID-19 emergency.  The Paycheck Protection Program (“PPP”) – a very prominent component of business relief available under the CARES Act that produces a forgivable business loan – has received incredible attention and scrutiny, while also raising many questions on proper compliance.  To clarify ambiguities, the Small Business Administration (“SBA”) has been regularly releasing guidance to address questions on PPP Loan implementation.  Most recently on April 14, the SBA released an interim final rule (“Regulation”) that addresses how self-employed individuals will be treated for PPP loan purposes.

For prior commentary and context on certain other aspects of the PPP program, as well as the SBA Economic Injury Disaster Loan (“EIDL”) program, please refer to our Firm’s prior articles available at:

Self-Employed Individuals

The Regulation confirms that individuals with self-employment income, who file a Form 1040 Schedule C, are eligible for a PPP loan, subject to the following conditions:

  1. the business must have been in operation on February 15, 2020;
  2. the individual must have self-employment earnings (such as money earned as an independent contractor or sole practitioner);
  3. the principal place of residence must be in the United States; and
  4. the individual must file a 2019 Form 1040 Schedule C.

Self-employed individuals meeting these criteria should be working with their bank representative to process a PPP application, promptly.  As will be discussed below, the applicant’s 2019 IRS Form 1040 Schedule C (“Schedule C”) will be very important for the PPP loan.  Although the 2019 federal filing deadlines have been extended to July 15 (see our prior tax commentary at:, applicants for the PPP loan must promptly complete their 2019 Form 1040 Schedule C to apply for a PPP loan.  This may cause some applicants to scramble as they catch-up on 2019 tax filing compliance, due to taking advantage of the IRS’s filing extension.

Partnerships and Limited Liability Companies

Pursuant to the new Regulation, partners in a partnership (or members in a limited liability company taxed as a partnership, as the case may be) may not submit a separate PPP loan application for themselves as a self-employed individual.  Earnings, up to $100,000 on an annualized basis, associated with a partnership activity may be reported as “payroll cost” on the PPP loan application filed on behalf of the partnership or limited liability company.  Rent, mortgage interest, utilities and other debt service costs are generally incurred at the partnership or company level, rather than at the individual partner level, and therefore it makes sense for the SBA and related lenders to process loan applications at the entity level, rather than for each individual partner.

Loan Amount Calculations

For self-employed applicants, a PPP loan amount will depend on whether there are employees.  If there are no employees, then the loan amount will be based on Line 31 of the applicant’s 2019 Schedule C, limited to $100,000, subject to the following calculation:

  1. Dividing the amount on Line 31 (limited to $100,000) by 12 to obtain a monthly average;
  2. Multiply the average determined in (a) by 2.5;
  3. Add the outstanding amount of any Economic Injury Disaster Loan (“EIDL”) made between January 31, 2020 and April 3, 2020 that shall be refinanced as a forgivable loan; and
  4. Subtract any advance received ($10,000) as part of the EIDL application.

Therefore, if the amount shown on an applicant’s 2019 Schedule C Line 31 is zero or less, then the applicant is not eligible for a PPP loan. This also makes certain that a self-employed applicant cannot receive a loan amount that exceeds $20,833.33 if there are no employees.

However, if a self-employed applicant has employees, then the applicant must compute the payroll expense by adding the following:

  1. Start with Schedule C, Line 31 (pursuant to a ceiling of $100,000 and a floor of zero); plus
  2. 2019 gross wages and tips paid to employees with a principal residence in the United States, computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, less any amounts paid to eligible employees in excess of $100,000 on an annualized basis and less all amounts paid any employee whose principal place of residence is outside the United States; plus
  3. 2019 employer health insurance contributions (Schedule C, Line 14), retirement contributions (Schedule C, Line 19) and state unemployment tax (“SUTA”).

Then the applicant will follow the steps outlined above for taking the average, multiplying by 2.5 and adjusting for the EIDL amounts, as may be applicable.

Loan Proceed Usage

Those individuals who receive PPP loans may use the proceeds to replace owner compensation (calculated based on 2019 net profits shown on their Schedule C), to replace employee payroll cost, to pay mortgage interest on a business obligation (not on a personal residence), make business rent payments, or pay business utility expenses.  The Regulation also requires that the applicant must have claimed, or be entitled to claim, a tax deduction for these expenses on their 2019 Form 1040 Schedule C for the costs to be permissible uses of PPP loan proceeds. Further, the proceeds must be applied against such expenses incurred during the 8-week period following loan origination.  PPP loan proceeds, including loans given to self-employed individuals, must be used at least 75% for payroll costs.

EIDL Program

Applicants should be aware of the interplay between EIDL and PPP loans.  If the applicant applied for and received an EIDL during January 31, 2020 and April 3, 2020, they may still apply for a PPP loan.  If the EIDL was not used for payroll costs, then it does not affect the applicant’s eligibility for a PPP loan.  However, if the EIDL loan was used for payroll costs, then it must be refinanced as part of the PPP loan.

Amounts Eligible for Forgiveness

PPP loans, used for permissible purposes, are eligible for forgiveness up to the full amount of the PPP loan plus accrued interest.  Permissible uses, as stated above, include costs incurred during the 8-week period following loan origination for:

(a)  payroll costs up to $100,000 (on an annualized basis) per employee, including salary, wages, tips and covered benefits for employees but not owners;
(b)  owner compensation replacement based on the 2019 Schedule C with loan forgiveness limited to 8 weeks’ worth of net profits (8/52 times the net profits amount), excluding any qualified sick leave amount claimed under the Families First Coronavirus Response Act (see our prior article posted at:;
(c)  payment of interest on mortgage obligations on business property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C;
(d)  rent payments on business leases in force before February 15, 2020, to the extent they are deductible on Schedule C;
(e)  business utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Schedule C.

Documentation Required for the PPP Loan Application

Self-employed individuals seeking a PPP loan must include with their application their 2019 IRS Form 1040 Schedule C (whether filed or not), along with any 2019 IRS Form 1099-MISC received.  Also, they must include invoices, bank statements, transaction details, and other documentation that establishes they are self-employed and were in business as of February 15, 2020.

Documentation Requirements for PPP Loan Forgiveness

As mentioned above, when applying for PPP Loan forgiveness, applicants should be prepared to submit their 2019 Form 1040 Schedule C.  Also, if the business operation has employees, the applicant will need to supply the quarterly Form 941 and state quarterly unemployment insurance tax reporting forms or equivalent payroll records pertaining to the covered period (8 weeks from loan origination).  Additionally, the business will need to substantiate business rents, mortgage interest, or utility payments made during the covered period.


Guidance on the PPP loan process continues to be issued and our attorneys are ready to assist all businesses and their owners with finding the relief available.  Although the PPP Loan process has become complicated, we understand what needs to be done and can help guide you through the application process.

The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly.

Adam Glassman is an attorney at the Cleveland, OH-based law firm of McCarthy, Lebit, Crystal & Liffman


While we would be thrilled to work with all individuals, institutions and companies that read our advisories, we  want to clarify that these insights do not form a lawyer-client relationship and represent only general guidance without access or reference to all of the specific facts and circumstances.  If you do wish to engage McCarthy Lebit on a specific matter, please contact us by calling 216-696-1422 or by filling out an inquiry form located here.  If you are already a firm client, please contact the McCarthy Lebit attorney you work with to discuss these advisories and/or the nature of your concern.  In closing, please understand that the law, especially during this pandemic, is changing rapidly and we would recommend that you regularly contact your legal counsel to ensure that your actions are taken based on the most up-to-date versions of the laws.

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