SBA PAYCHECK PROTECTION PROGRAM (PPP) - Updated April 15, 2020 - Heritage Bank

SBA PAYCHECK
                                                         PROTECTION PROGRAM (PPP)
                                                                                   Updated April 15, 2020

Special Instructions for Independent Contractors and Sole Proprietors

Summary
Effective Friday April 10, 2020, the US Treasury and Small Business Administration made Paycheck
Protection Program (“PPP”) forgivable loans available to more working Americans. You may apply for a
PPP loan if you operate your business as one of the following:
    •   Independent Contractor (1099 income reported on your 1040)
    •   Sole Proprietor or Single-Member LLC (Schedule C)
    •   Partnership (Form 1065)

You are eligible to apply whether or not you have employees, though the calculation of loan amount and
recordkeeping requirements will be different.
Loan forgiveness is an important feature of the PPP loan. Once funded, your PPP loan may be partially or
completely forgiven by the SBA in about two to three months. At this date, there isn’t sufficient detailed
guidance from the SBA about PPP forgiveness for Independent Contractors, Sole Proprietors and
Partnerships. As such, we have not developed a loan forgiveness calculator for your use. When we learn
more from the SBA, we will share the details with you.
Heritage Bank has been processing applications for Companies since Friday, April 3rd and is now ready to
take your application. Please see the Heritage Bank Program Requirements Guide to understand the
process, forms and the kinds of information you will need for a complete application. As an Independent
Contractor, Sole Proprietor or Partnership, the way you calculate the eligible loan amount - and the
supporting compensation records needed to do so - will be different from those used by companies.
However, all PPP loans have one thing in common: They are determined first by calculating your
business’s Average Monthly Compensation paid to you and your employees – see the details below. The
eligible PPP loan amount is simply 2.5 times your Average Monthly Compensation.
Here is guidance on records that you’ll need, and how to get started:
Independent Contractors and Sole Proprietors with no Employees
As an independent contractor, you have likely received IRS Form 1099 by your customers or clients at
year-end. If you operate as a Sole Proprietor working alone, you also likely prepare a Schedule C with your
annual 1040 personal tax return. In both cases, a completed Schedule C for 2019 is required with your
PPP application – even if it is not yet filed and even if you have never filed one in the past. Once prepared
the “Net Profit” on Line 31 represents your annual compensation. See the Heritage Bank IC + SP Simple
Loan Calculator or use your own calculator to determine your Average Monthly Compensation.
Sole Proprietors with Employees
Though you file taxes on your personal tax return using Schedule C, chances are that your business looks
like a company. You will use a loan calculator that allows for both payroll to employees as well as your own
Net Income to determine Average Monthly Payroll and then the eligible PPP loan amount. See the
Heritage Bank IC + SP Simple Loan Calculator. It will include payroll records about your employees and
Schedule C Net Income for you (plus your salary if you take one). Finally, you can then add certain

SBA PAYCHECK
                                                          PROTECTION PROGRAM (PPP)
                                                                                   Updated April 15, 2020

compensation related costs you pay for your employees (but not for yourself) such as health care
premiums and retirement contributions made in 2019.
Partnerships
The process and guidelines are the same as outlined above, with the only difference being the source
documents used in determining your compensation for purposes of the PPP loan calculation. Instead of
Schedule C, you will use Form 1065 if a partnership.

Eligible Compensation for PPP
A fundamental requirement of PPP is that you submit a valid IRS form or schedule for 2019 as an integral
part of your application. For most, this is Schedule C to your personal 1040. For partnerships, it is Form
1065. If you have yet to file your 2019 taxes, you must still complete and include the relevant tax form with
your PPP application. If you’ve never filed a Schedule C, you must still prepare it for the application.
One key to quick approval is correctly calculating and supporting the compensation for yourself and your
employees (if applicable), the combined amount being the basis for determining your Eligible Loan
Amount. The definition of Eligible Compensation varies depending on whether or not you have employees
– see below:
Eligible Compensation for Independent Contractor, Sole Proprietor & Partnerships with no
Employees
The Net Income that you earn from your business is eligible compensation, found on Line 31 of your IRS
Schedule C (or Line 22 of Form 1065) If you pay yourself a salary and it is listed on your tax form or
schedule, you may add that back to Net Income as part of Eligible Compensation. Benefits, such as health
insurance and retirement contributions, purchased for yourself as owner are not eligible for PPP.
Eligible Compensation when you have Employees
The Net Income that you earn from your business is eligible compensation, along with any wage you pay
yourself through payroll. See the rules above for details.
In addition to your own earnings, Eligible Compensation also includes payroll paid to your employees, as
follows:
    •   Salary and wages
    •   Commissions or similar
    •   Cash tips, allocated tips
    •   Vacation, parental and family leave, sick leave or PTO
    •   Allowance for separation or dismissal

All of the compensation categories above are typically paid through a payroll process. If you also purchase
benefits for employees, these too qualify as Eligible Compensation for PPP. Additional eligible
compensation costs include those most commonly paid outside of payroll:
    •   Health care coverage, including insurance premiums, that you paid for employees
    •   Retirement contributions that you paid for employees
    •   State and local taxes you paid based on the compensation of your employees

SBA PAYCHECK
                                                            PROTECTION PROGRAM (PPP)
                                                                                  Updated April 15, 2020

However, any benefits purchased for yourself as owner are not eligible for PPP – do not add them into
your loan calculation. Finally, you may not include contributions that your employees paid for their own
benefits, even if you withheld them via payroll deduction.

Excluded from Eligibility
For all applicants, PPP expressly excludes:
    •    Compensation of anyone whose residence is outside the US
    •    The portion of any person’s compensation of beyond $100,000 per year, including yourself
    •    Any benefits purchased for yourself as owner or partner

No Add Back for Non-Cash Expenses
Many Sole Proprietors and Partners reasonably consider their “pay” to be the cash flow generated by their
business. As such, you may be considering adding back certain Schedule C tax expenses to your Net
Profit or (Loss) because they don’t impact personal or partnership cash flow. These include Depreciation,
Section 179 and Depletion as the most common. PPP does not allow adding back such expenses in the
determination of Eligible Compensation, and therefore loan amount.

Required Documentation
A complete PPP application includes all of the following:

    1)   The completed PPP application
    2)   Your loan calculator
    3)   Your 2019 IRS Schedule C or Form 1065, as appropriate
    4)   Relevant source documents that support your calculation and the information presented on your
         2019 IRS form or schedule

Source Documents
To support your own Eligible Compensation, your Schedule C or Form 1065 is sufficient.

For employee compensation, you will need to submit:
    • 2019 Form 940, or forms 941 covering all four quarters of 2019
    • If you have employees who earn more than $100,000 per year, or who’s residence is outside the
       US, include their W-2 or an end of year payroll record such as a remittance detail
    • You may also choose another form of documentation, such as a report from a payroll service.

For benefits paid to your employees (but not to yourself or your partners), you will need to submit:
    • For health care expenses, including insurance, documents supporting the amount you paid on
       behalf of your employees – can include insurance or agency statements, and remittance records
       for direct health care costs.
    • For retirement contributions of all types, documents supporting the amount you paid on behalf of
       your employees - can include brokerage or administrator statements, and remittance records as a
       last resort.

SBA PAYCHECK
                                                          PROTECTION PROGRAM (PPP)
                                                                                    Updated April 15, 2020

Any amounts that you paid for healthcare and retirement are not eligible for PPP. As a result, the records
submitted must clearly distinguish between your own costs and those which you contributed toward your
employee’s benefits.

Eligible Uses of Funds and PPP Loan Forgiveness
The SBA has thus far provided limited information on the loan forgiveness process, along with preliminary
calculation formulas specifically designed for Independent Contractors, Sole Proprietors and Partnerships.
We expect further information in the near future from the SBA about PPP forgiveness. We will provide a
forgiveness calculator and additional guidance at that time.

Eligible Uses
The CARES Act was enacted to encourage companies, sole practitioners and partnerships to maintain
current employment during the COVID-19 pandemic. As such, the allowed uses of PPP loan funds include
compensation and benefit expenses, along with certain facilities costs to house the employees. The PPP
coverage period is eight weeks starting from the date of your loan funding. During this period, allowed use
of PPP funds include the following (which will also be used in determining loan forgiveness):

    •   Compensation of virtually all types as outlined previously – including wages for your employee and
        lost earnings for yourself (see below for detail)
    •   Healthcare and retirement benefits
    •   Rent for your business
    •   Mortgage interest on your business real or personal property
    •   Utilities for your business

Note that while facilities costs are eligible, PPP does not allow use of funds to reimburse the applicant
home office or home workshop expenses.

Forgiveness Considerations
PPP Loan Forgiveness is a separate process and calculation from the determination of eligible PPP loan
amount. It is different in these ways:

    a. Instead of 2 ½ months of compensation and benefits, it will be based on the eight-week period
       following loan funding and include eligible facilities costs described above
    b. Documentation requirements are expected to be the same types as used to support the initial loan
       application, but limited strictly to the 8-week forgiveness period.
    c. In determining your own compensation eligible for forgiveness, the SBA has determined it is to be
       calculated based on 2019 Net Income (Schedule C or 1065) but proportioned down to eight
       weeks. The required calculation is: 2019 Net Income divided by 52 times 8 = Forgivable Comp.
    d. Non-compensation facilities expenses will be capped at no more than 25% of the total amount
       forgiven.

SBA PAYCHECK
                                                         PROTECTION PROGRAM (PPP)
                                                                                  Updated April 15, 2020

This guidance pertains to an application for a loan under the Paycheck Protection Program (PPP). Loan
approval is subject to providing required certifications and meeting all PPP requirements. The loan
amount calculations set forth in the application and related materials are not determinative, and in the
event your loan is approved, it may be for a lesser amount.
Although PPP is open until June 30, 2020, loan funds are subject to an overall lending cap authorized by
Congress. Additionally, Heritage Bank and federal and state regulatory authorities may imposed other
limitations applicable to PPP loans. As a result, loan funds may not be available even though you qualify.
Loan forgiveness may be available if your loan is approved. However, loan forgiveness is also subject to
all PPP requirements. Please be advised that there is a tremendous demand for PPP loans. Heritage
Bank makes no representation regarding the availability or approval of credit.