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The Paycheck Protection Program, the EIDL Program and the Solopreneur

April 03, 2020 | By Patrick T. McCloskey

Updated on 07/06/2020

This post is being updated to alert solopreneurs that the deadline for applications under the PPP has been
extended through August 8, 2020. In addition, on June 19, 2020 the SBA published an interim final rule reflecting updates resulting from the Paycheck Protection Program Flexibility Act of 2020, which modified certain rules related to the PPP, including provisions related to loan forgiveness and maturity. Among other things: (i) the “covered period” for purposes of calculating the loan forgiveness amount of a PPP loan was extended from eight weeks to 24 weeks (borrowers who took a PPP loan prior to June 5, 2020 can still elect to use the eight week period) and (ii) for PPP loans made after June 5, 2020, the minimum maturity for such loans (to the extent not forgiven) has been extended from two years to five years (borrowers who took a PPP loan prior to June 5, 2020 can have their maturity extended from two to five years with the mutual agreement of their lender). The new interim final rule also includes clarifications on calculating the PPP loan forgiveness amount and the SBA has published a simplified EZ Loan Forgiveness Application (Form 3508EZ) accompanied with instructions, which may be helpful for solopreneurs who have received a PPP loan.

Updated on 04/27/20

This post is being updated to provide that on April 14, 2020 the SBA
published an interim final rule with guidance for solopreneurs interested in applying for a loan under the Paycheck Protection Program (PPP). According to the published rule, a solopreneur who was in business as of February 15, 2020 and whose principal residence is in the United States is eligible. However, for a solopreneur who has filed or will file a Schedule C with his or her 2019 Form 1040 tax return, if the net profit in line 31 of the Schedule C is zero or less, then such solopreneur does not qualify. According to the published rule, the SBA will publish additional guidance for solopreneurs who (i) were not in business during 2019 but were in business as of February 15, 2020 and (ii) will file a Schedule C with their Form 1040 for 2020.

The published rule contains important guidance for solopreneurs on how to calculate the PPP loan amount, the permitted uses of the PPP loan proceeds and the forgiveness of the PPP loan.

The above referenced interim final rule applies to applications submitted under the PPP through June 30, 2020, or until funds made available for the PPP are exhausted.

Although the initial $349 billion allocation for the PPP was exhausted as of
April 16, 2020, an additional $310 billion was added to the PPP in legislation enacted on April 24, 2020.

The published SBA guidance provides that the PPP loans are made on a first come, first served basis.

As widely reported, the Coronavirus, Aid, Relief, and Economic Security Act (the “CARES Act”) included a $349 billion small business loan package, referred to as the Paycheck Protection Program (“PPP”), and expanded the existing United States Small Business Administration (“SBA”) Economic Injury Disaster Loan Program (the “EIDL”), both meant to address the economic impact of the COVID-19 outbreak on small businesses.

In a nutshell, the PPP provides for SBA-guaranteed loans equal to 2.5 x the average monthly payroll costs of the borrower, subject to a maximum loan amount of $10 million. So long as the loan proceeds are used for specified purposes (payroll costs, rent, mortgage interest and utilities) during the 8 week period after funding, the loan will be forgiven,1 subject to (i) a formula-based adjustment if the borrower reduces employee headcount and (ii) a dollar-for-dollar adjustment if the salaries of employees making less than $100,000 are lowered by more than 25%, in each case between February 15, 2020 and June 30, 2020.2

Although the United States Treasury Department announced on March 31, 2020 that interest on PPP loans would be fixed at 0.5%, the SBA’s Interim Final Rule, released on April 2, 2020, changed the rate to 1.0%. Payments of principal and interest on the PPP loans will be deferred for six months, the loans will have a two-year maturity and any forgiven amount will not be taxable income to the borrower, as a cancellation of indebtedness ordinarily would be. The PPP loans will be unsecured (no collateral) with no personal guaranties required. According to the Lender Information Sheet published by the Treasury Department, no lender fees can be charged to the borrowers.

On its face, the PPP provides that sole proprietorships, independent contractors and self-employed individuals are all eligible borrowers.3 However, the criteria provided to lenders for screening applicants may be a stumbling block for sole business owners with no employees—so called solopreneurs.4

The PPP expressly provides that loan approval authority is being delegated from the SBA Administrator to participating lenders.5 The criteria such lenders are charged with “considering” are two-fold. First, the lender must consider whether the prospective borrower was in existence on February 15, 2020. Second, the lender must consider whether the business either (i) had employees for whom the prospective borrower “paid salaries and payroll taxes” or (ii) “paid independent contractors, as reported on a Form 1099-Misc.”6

The Lender Information Sheet published by the Treasury Department suggests these “considerations” are actually underwriting requirements for participating banks. In response to an FAQ that asks “[w]hat underwriting is required?”— the document states, in part—“[y]ou will need to verify that a borrower had employees for whom the borrower paid salaries and payroll taxes.” The SBA’s Interim Final Rule contains similar language—“[e]ach Lender shall . . . confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes . . .” There is no reference in the underwriting requirements set forth in either document to independent contractors being paid on a Form 1099-Misc, and it is unclear if this was an oversight.7

As the term implies, solopreneurs “go it alone.” With the exception of a solopreneur who is the sole shareholder of a corporation (more on this below),8 no solopreneur, regardless of the label (sole proprietorship, independent contractor or self-employed individual), is likely have employees for whom he or she has paid salaries and payroll taxes, or likely to have hired independent contractors for whom he or she has paid via Form 1099-Misc.

A sole proprietor is not considered a W-2 employee of his or her business, so a sole proprietorship that hires no employees will not withhold or pay payroll taxes. The sole owner of a limited liability company (LLC) is treated the same way, unless the owner takes the unusual step of electing to have the entity taxed as a corporation. Instead of payroll tax, these single owners pay self-employment taxes reported on a Form SE that accompanies the Schedule C filed with the owner’s Form 1040 tax return.9

Interestingly, a solopreneur who is the sole shareholder of a corporation is treated as a W-2 employee, meaning he or she could satisfy the criteria. However, even in this instance it is still not crystal clear whether such a corporation would clear the hurdle, since the references to “employees” and “salaries” in the criteria are plural, suggesting there may need to be at least two W-2 employees.

Even assuming eligibility for solopreneurs under the PPP, their loan limit would be 2.5 x their average monthly income10 over the past year,11 capped at $100,000 and pro-rated accordingly. Still, this money would go a long way for most solopreneurs who are presumably suffering just like businesses with 499 employees, perhaps more so given limited resources. The PPP loan funds could be used by a solopreneur to pay rent and utilities, which includes transportation, telephone and internet access.12

While the statutory language in the CARES Act left an ambiguity as to whether the evaluation criteria were mere guidelines or rigid prerequisites,13 that issue is less uncertain given the wording in the Information Sheet for participating lenders and the SBA’s Interim Final Rule, each of which characterizes the employee payroll taxes criterion as an underwriting requirement.

Another lingering question is whether “payroll taxes”, as such term is used in the PPP, is meant to include self-employment taxes.14 Even assuming that was the intent, the use of the terms “salaries” and “payroll taxes” in the underwriting requirements may result in banks insisting on seeing W-2s and payroll tax filings, which solopreneurs who pay self-employment taxes will be unable to provide. If this occurs, it will cause confusion and delays, which will be prejudicial to solopreneurs since the SBA’s Interim Final Rule provides that the PPP is being administered on “first-come, first-served” basis.

If the PPP was intended to be made available to solopreneurs, the Treasury Department and the SBA should publish guidelines to clarify this. One would expect participating banks to strictly adhere to the underwriting requirements to avoid the risk of losing the SBA’s guaranty. If the PPP was not intended to apply to solopreneurs, it would be quite the head fake.

Solopreneurs should not be discouraged from applying for a loan under the PPP, with documentation supporting their income and payment of self-employment taxes. Perhaps clarity on this issue will emerge once applications get going. According to the Treasury Department’s announcement, small businesses and sole proprietorships can start applying on April 3, 2020 and independent contractors and self-employed individuals can start applying a week later, on April 10, 2020. Even these categories are confusing for a solopreneur. Consider a single-member LLC with no election to be taxed as a corporation operating a business with no employees. This is a small business (less than 500 employees), a sole proprietorship for tax purposes and the owner pays self-employment taxes. Which category does the solopreneur’s business fall into? Since the PPP loans will be administered on a first-come, first-served basis, a solopreneur fitting this profile may be at risk by waiting until April 10, 2020 to apply.

For solopreneurs interested in applying for a PPP loan, New York’s Empire State Development Corporation has published a helpful checklist for compiling documentation, including the application itself, each of which can be accessed here.

The eligibility of solopreneurs under the EIDL Program is less ambiguous. The CARES Act amended the Small Business Act so that the term “eligible entity” now includes “any business with less than 500 employees” and “any individual who operates under a sole proprietorship, with or without employees, or as an independent contractor” (italics added).

While the EIDL terms are not nearly as favorable as the PPP,15 the process may be smoother for solopreneurs. For one thing, the CARES Act amended the EIDL terms so that the SBA Administrator can approve the loan based solely on the credit score of the applicant, without a requirement to submit a tax return or prove that credit is not available elsewhere. In addition, as a result of the CARES Act amendments, an EIDL applicant affected by COVID-19 can receive an emergency advance/grant of up to $10,000 within three days of applying, so long as the EIDL applicant self-certifies (under penalty of perjury) eligibility for an EIDL. These advances do not need to be repaid even if the EIDL application is ultimately rejected.16

Applications for EIDLs are live, and can be accessed here. The SBA has published helpful instructions for completing the EIDL application, which can be accessed here.

New York City solopreneurs affected by COVID-19 can also apply for an interest-free business continuity loan of up to $75,000 from the NYC Department of Small Business Services. To qualify under this program, a solopreneur would need to (i) have been in business for at least two years, (ii) demonstrate a 25% or greater reduction in revenue caused the COVID-19 outbreak and (iii) demonstrate “the ability to repay the loan.” A link to apply to this program can be accessed here, and the NYC Department of Small Business Services has also made available a participation affidavit and an application document checklist.

This blog post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).

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1The Borrower Information Sheet published by the United States Treasury Department on March 31, 2020 provided, “[d]ue to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.” The SBA’s Final Interim Rule provides “[w]hile the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll. The Administrator has determined in consultation with the Secretary that 75% is an appropriate percentage in light of the Act’s overarching focus on keeping workers paid and employed.”

2Employee headcount reductions and salary decreases that would otherwise impact the forgiven amount will be disregarded so long as they are cured within 30 days after the enactment of the CARES Act.

3See CARES Act 1102(a)(1)(B) (“(D)(ii) INCLUSION OF SOLE PROPRIETORS, INDEPENDENT CONTRACTORS, AND ELIGIBLE SELF-EMPLOYED INDIVIDUALS–In General–During the covered period, individuals who operate under a sole proprietorship or as an independent contractor and eligible self-employed individuals shall be eligible to receive a covered loan”).

4The term “solopreneur” has emerged as the gig economy has grown, with the word being added to the Merriam-Webster Dictionary last year. It is meant to apply to any individual, including a freelancer, who runs a business by himself or herself, without hiring employees or independent contractors. These individuals accounted for approximately 36% of the entire US workforce in 2019. See Rieva Lesonsky, The State of Freelancing in America, Score, June 21, 2019: https://www.score.org/blog/state-of-freelancing-in-america.
In 2017, New York City passed the Freelance Isn’t Free Act to protect gig workers from nonpayment.

5The CARES Act provides that any bank lender approved to make loans under the PPP “shall be deemed to have been delegated authority by the [SBA] Administrator to make and approve covered loans, subject to the provisions of [the PPP].”

6With respect to the PPP, the CARES Act provides, “[i]n evaluating the eligibility of a borrower for a covered loan with the terms described in [the PPP], a lender shall consider whether the borrower–(a) was in operation on February 15, 2020 and (b) [either] (i) had employees for whom the borrower paid salaries and payroll taxes; or (ii) paid independent contractors, as reported on a Form 1099-Misc.”

7The SBA’s Interim Final Rule states that independent contractors do not count as employees for purposes of calculating a PPP loan amount. The rationale given is that independent contractors can apply for a PPP loan on their own. This suggests the removal of the payment of an independent contractor as an underwriting requirement may have been intentional.

8The sole shareholder of a corporation who performs services on behalf of the corporation must generally classify himself or herself as an employee and withhold and remit payroll taxes on the compensation for such services.

9These individuals are typically required to pay estimated taxes on a quarterly basis.

10Under the PPP, “Payroll costs” include “payments of any compensation to or income of a sole proprietor or independent contractor that is wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period.”

11The measurement period for average monthly payroll costs can differ for seasonal businesses and businesses that were not in existence between February 15, 2019 and June 30, 2019.

12Under the CARES Act, “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.”

13As referenced elsewhere, the criteria language in the PPP portion of the CARES Act provides that “lenders shall consider . . .” (italics added).

14The exclusions to the calculation of “payroll costs” specifically reference the Internal Revenue Code sections that relate to federal payroll taxes for W-2 employees, but the definition of payroll costs does not contain a reference to the Internal Revenue Code section relating to self-employment taxes. As a result, even assuming payroll taxes are meant to include self-employment taxes, it is not clear how self-employment taxes are meant to be treated for purposes of calculating a solopreneur’s payroll costs.

15Among other things, loans under the EIDL program are not forgivable, are generally secured by collateral and, for loans more than $200,000, may require a personal guaranty. The interest rate is 3.75% and the maximum amount of each loan is $2 million.

16If the recipient of an EIDL advance also receives a PPP loan, the amount of the advance will be subtracted from the amount of the PPP loan that would otherwise be forgiven.