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On April 24, 2020, the MSBA Tax Section hosted its third webinar in as many weeks to help lawyers and others understand the intricacies of the CARES Act Payroll Protection Plan. On the very day that Congress approved an additional $370 billion for the program, Frost Law attorneys Peter Haukebo and Rebecca Sheppard presented PPP for the Self-Employed (and Why We Sued the Federal Government), which built on earlier presentations on the PPP loan program for small businesses operating as corporations, limited liability companies, or partnerships.

Before discussing the PPP as it applies to the self-employed, the presenters reported on the fast pace of developments regarding the SBA’s pre-COVID Economic Injury Disaster Loan (EIDL) program, which can provide emergency small business grants of up to $10,000. They then recapped PPP eligibility requirements and formulae for calculating loan amounts, and moved their discussion to recent guidance issued by the government for the self-employed, including sole proprietors, independent contractors (and some entities) that have or will report their income on a 2019 Form 1040 Schedule C. Step-by-step instructions for calculating potential PPP loans for self-employed individuals, which differ depending on whether the borrower has employees, were provided.

Special attention was paid to maximizing loan forgiveness. Ms. Sheppard and Mr. Haukebo noted that the PPP loan can effectively be turned into a grant if within 8 weeks of loan origination, 75% of the proceeds are used for “payroll costs” (as defined in the CARES Act and which differ depending on the status of the employee), “full time employee equivalents” (FTE’s) are maintained at certain levels, and total compensation is not reduced by more than 25%. Use of loan proceeds for expenses other than payroll costs must also be limited to “eligible expenses,” which can include rent, current mortgage principal and interest, and some utility payments. Each of these concepts involve their own calculations, “lookback” periods and the like, which the presenters reviewed in detail. Best practices for maximizing loan forgiveness, such as maintaining separate bank accounts for tracing loan proceed disbursements, were also suggested.

One important limitation that applies to the self-employed (but not their employees or employees of other entities) involves the calculation of payroll costs. Such costs generally include salary, wages and tips up to $100,000 of annualized pay per employee, plus employee benefits. Mr. Haukebo noted, however, that employee benefits have been excluded from the calculation for individual business owners, which has a disparate impact on small businesses when it comes to the calculation of both the loan amount and the amount subject to forgiveness. As nonemployer or Schedule C businesses are disproportionately owned by minorities and women, this has a discriminatory effect, in his view. The impact has been magnified by the fact that PPP loan applications for these businesses were delayed for several reasons, and by the time sufficient guidance was offered, program funds had been exhausted. On April 21, Frost Law initiated a class action lawsuit to address these concerns.

A lively, 30 minute question and answer period followed the presentation. All three of these webinars can be viewed below.