Last evening, the Small Business Administration (SBA) released an Interim Final Rulemaking Guide for individuals that file Paycheck Protection Program (PPP) applications. The guidance clarifies several aspects of the PPP loan application amount that were previously uncertain and provides taxpayer-friendly guidance on the use of PPP funds.


Guidance for filing PPPs released earlier this month disallowed businesses from including Independent Contractors and Self-Employed (“CSE) individuals from their calculation of payroll costs. It also pushed the time frame for those individuals to apply for separate PPPs until April 10 (last Friday).

Key points of the rulemaking:

  • ICSEs will utilize their 2019 1040 Schedule C as the basis for their loan application if in operation on or before February 15, 2020.
  • Active general partners in a general partnership will not file individual loan applications; rather, their self-employment income (up to the $100,000 salary cap) will be included in the partnership’s PPP application. (While not explicitly stated, it appears this treatment also applies to LLC members in LLCs taxed as partnerships.)

ICSEs without Employees

For ICSEs without employees, to calculate the maximum loan amount, use the amount of Net Profit found on Line 31 of 2019’s Schedule C. If zero or a loss, no PPP application may be filed; if in excess of $100,000, the salary cap will apply. Divide by 12 and multiply by 2.5. If there is an outstanding Economic Injury and Disaster Loan (EIDL) from between Jan. 31 – April 3, 2020, add that amount.

  • The applicant’s 2019 Schedule C, whether filed or not, must be included in the application, along with 1099-Cs or invoices and/or bank records demonstrating self-employment.
  • An invoice issued in 2020, or a 2020 bank statement or book of record, must also be provided to establish that the applicant was in operation on or around Feb. 15, 2020.

ICSEs with Employees

For ICSEs with employees, start with Line 31 on the 2019 Schedule C, subject this time to only the $100,000 salary cap; if the business operated at a loss, use zero.

  • Add in the following:
    • 2019 gross wages and tips paid to domestic employees (excluding the excess of salaries paid over $100k per employee)
  • Non-cash benefits such as health insurance, retirement contributions and state and local taxes assessed on employee compensation.
  • Divide the total by 12 and then multiply by 2.5. If there is an outstanding EIDL from between Jan. 31 – April 3, 2020, add that amount.
  • The following items must be included with the application:
    • Schedule C of 2019 1040 return, whether filed or not
  • Forms 941 for each quarter of 2019
  • A Feb. 15, 2020 payroll statement or similar documentation establishing operations during 2020

What Loan Can Be Used For

Uses of proceeds of the loan are similar to those for non-ICSEs and forgiveness will be subject to the same limitations on non-payroll costs. Notably for ICSEs, the proceeds can be used to pay:

  • Owner compensation, calculated based on 2019 net profit
  • Employee payroll costs
  • Business mortgage interest (but not principal) or rent payments
  • Business utility payments (if such expenses were deductible in 2019 as well)
  • Interest payments on other debt obligations
  • Refinancing of an SBA EIDL loan made between January 31 and April 3, 2020

Practical Considerations of this Guidance

Although the 2019 return due date was automatically extended from April 15 to July 15, ICSEs will still need to prepare their 2019 Schedule C now in order to apply for the PPP loan. In a taxpayer-friendly move, this guidance allows a Schedule C owner to replace lost compensation (based on their 2019 net income) with the payment to themselves potentially qualifying for loan forgiveness.

Additional Clarifications

In this Interim Rulemaking, the SBA clarified several additional items:

  • PPP Lender directors or shareholders are permitted to apply for PPP loans through the Lender they are associated with, although such directors or shareholders may not be officers of the Lender and apply through that Lender.
  • Legal gaming operations are now limited to those operations that did not have in excess of $1 million in revenue in 2019 and such legal gaming revenue was less than 50 percent of total revenue in the same period.
  • The SBA intends to provide future guidance for ICSEs who were not in operation in 2019 but were operating on Feb. 15, 2020.

If you have any questions on the PPP loan or CARES Act, please reach out to our COVID-19 Response Team.

David Horwich Thumbnail

David Horwich

David Horwich is GHJ's Growth Planning and Strategic Advisory Practice Leader. He provides his clients with a focused, integrative and transparent approach and has advised clients in all facets of transactional activity, including raising capital and buying and selling their businesses. He has…Learn More