Some SE Guidance – Just Not All Good

• April 14, 2020
• Paul Neiffer

The SBA issued some additional Interim Final Rules today and most of it dealt with self-employed taxpayers.  We were hoping that gross receipts would qualify.  For an Uber driver it might if they only received a Form 1099 from Uber and have little or no expenses.

For the typical SE farmer, it remains based on net farm income.  However, in the guidance today it continues to refer to Schedule C taxpayers and not Schedule F.  Farmers tend to have a lot more equipment gains reported on Form 4797 that is not reported on Schedule F.  Therefore, we may see additional guidance from SBA or perhaps the USDA will come out with guidance for farmers.

Here is a recap of the key points from the guidance.

The first question discussed if a self-employed Schedule C taxpayer is eligible.  The answer is yes as long as you:

• Were in operation on February 15, 2020;
• You are self-employed;
• Your principal residence is located in the United States; and
• You filed or will file a Form 1040 Schedule C for 2019 (you do not have to file one yet).

Again these references are to Schedule C but you should be able to substitute Schedule F.

Partnerships are eligible for PPP loans and this requires the partnership to include the self-employment income of all partners as part of the overall payroll costs for the partnership.  The guidance precludes each partner from getting a loan.  However, the guidance is silent on partners that are in multiple partnerships.  For example, assume a farmer is a partner if five partnerships and she earns at least $100,000 of net SE earnings in each partnership.  The guidance is silent as to whether each partnership can use her full $100,000 compensation limit or whether it has to be allocated among each partnership.

If you participate in the PPP, you are prevented from applying for unemployment.

Question #2 discussed how to calculate the maximum amount you can borrow based on your SE earnings.  It is very simple – look on Schedule C line 31 net profit.  If it is over $100,000, then you limit it to $100,000.  If it is a loss, you get zero. However, you do get to add in all of your employee payroll costs to this number.  For 2019 Schedule F’s you would look to line 34.

They are requiring you to provide a copy of the 2019 Schedule C (or Schedule F) whether you have filed it or not.  Now some creative farmers will provide a Schedule F showing net profits of over $100,000 if they have not filed thinking they will qualify for a larger loan knowing the final filed return will be lower.  It is highly likely that SBA will receive a copy of the filed Schedule C or F before finalizing any forgiven amount.  This will result in you not having the excess forgiven and could open yourself to penalties plus owe interest at 1%.

Now some farmers will ponder about filing an amended tax return to increase their net income for 2019 on Schedule F.  This may be allowed, but is it worth the cost.  To get any additional loan proceeds, you will need to spend 15.3% on self-employment tax plus federal and state income tax.  At a minimum this would likely be at least another 10% for 25% tax.  Therefore assuming you are zero to get a maximum $20,833 loan you will spend at least $25,000 in taxes.  That does not sound like a good deal to me.

They now clarified that interest on secured personal property is allowed to be used with loan proceeds and will qualify for forgiveness.  They also indicate that gas used in your business vehicle qualifies as utilities (I am not sure their reasoning on this but it is being allowed and again I think it helps the Uber driver). If you did not claim these expenses on your 2019 return you can’t claim them as part of the forgiveness.

It appears that no expenses between January 1, 2020 and February 14, 2020 will be allowed as documentation.

They still indicate you have to use at least 75% on payroll costs.  For your SE payroll costs, it appears they are making it easy.

Accrued interest can be forgiven.

For both the loan calculation and the amount of forgiveness you are not allowed to include any owner’s health insurance or retirement payments.  You simply refer to Schedule C or F net income.

We are still a little fuzzy on the loan forgiveness for the SE owner compensation.  It appears that you take the total Schedule C or Schedule F compensation shown on the 2019 tax return.  You then divide this by 52 and multiply by 8.  This is the amount that is automatically forgiven (we think).  This means if you qualify for the maximum loan amount of $20,833, you will still owe $5,448 even though you may spend at least $20,833 on operating costs.  If you spend less than $15,385, it is likely that the non-forgiven portion will increase.

However, the wording on this part of the guidance appears to be directed solely toward SE individual such as an Uber driver.  For a farmer with payroll, mortgages, rents and utilities, we would hope that USDA would inform SBA to fix this since it appears to penalize a farmer for simply being a Schedule F.  There would be no penalty for being an S or C corporation.

We hoping there will be additional guidance from the SBA for farmers especially if equipment gains do not count.  In that case, most farmers will simply obtain a loan based on their employee’s payroll costs since farmers had very little Schedule F net profits in 2019 (total Schedule F losses over the last decade have averaged over $5 billion annually).

 

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