Small Self-Employed Businesses Benefit from New SBA PPP Rules
March 9, 2021
The Small Business Administration (SBA) recently made an announcement on Paycheck Protection Program (PPP) loans which could allow small, self-employed businesses to benefit significantly more than under the former rules. On March 3, 2021, the SBA published a 32-page interim final rule (IFR) titled “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to Loan Amount Calculation and Eligibility” providing changes for PPP first and second draw loans approved after March 3, 2021.
An important change in this IFR is a revision to how the maximum PPP loan is calculated for sole proprietors who file an IRS Form 1040 Schedule C or F, and, as of March 3, 2021, have yet to complete an application for a first or second PPP loan. Previously, PPP loans for those self-employed individuals were based solely on net income, resulting in smaller approved loan amounts. Net income does not consider fixed and other business expenses that keep small businesses in operation. Now, PPP first and second-draw loan applicants can use gross income to calculate the maximum loan amount, which could expand loan funding for independent contractors, self-employed individuals, and sole proprietors. The SBA and Treasury also ruled that PPP loans previously approved may not use the new formula to increase their established loan amounts.
Schedule C Filers with No Employees:
For those with no employees, the new maximum loan amount is based on 2019 or 2020 IRS Form 1040 Schedule C using:
- line 7 gross income (receipts less cost of goods sold) or line 31 net profit; the amount considered for the loan cannot exceed $100,000.
- divide that amount by 12, then multiply by 2.5 (3.5 for businesses with a NAICS code starting with 72, accommodations and food services, applying for a second PPP loan).
If using 2020’s Schedule C but the 2020 return has not been filed, fill out Schedule C and compute the loan.
First draw loans: same as before, the loan cannot exceed $20,833.
Second draw loans: the loan cannot exceed $20,833 or $29,167 for NAICS 72 businesses.
Schedule C Filers with Employees:
For those with employees, the new maximum loan amount is based on 2019 or 2020 IRS Form 1040 Schedule C using:
- line 31 net profit OR
- gross receipts adjusted for payroll costs:
(a)
• line 7 (gross income) minus line 14 (employee payroll costs), line 19 (pension/profit sharing), and line 26 (wages)
• divide the net amount, which cannot be above $100,000, by 12
(b) add average monthly payroll costs
• multiply the sum of (a) and (b) by 2.5 (3.5 for NAICS 72 businesses applying for a second PPP loan)
Note that the same rules apply for those filing Schedule F for their self-employed farming operation, and similar lines on that form can be used.
Safe Harbor:
A PPP loan applicant is required to certify that current economic uncertainty makes the loan necessary. The SBA provides a safe harbor to PPP loan borrowers granted less than a $2 million loan, under which the SBA accepts the applicant’s certification at face value. Loans of $2 million or more are subject to review to further consider their claim of uncertainty. The new IFR states that Schedule C and F loan applicants reporting more than $150,000 in gross income and using gross income to calculate their PPP loan amount will not be granted the SBA safe harbor. Since the loan amount for the self-employed individual (excluding employees) is based on a maximum of $100,000, loan applicants with net income exceeding $100,000 should use net income to calculate their loan amount. This will grant borrowers the same maximum loan funding, while allowing them to remain under the safe harbor.
New/Revised Forms:
Forms to accommodate this new PPP loan ruling are:
Form 2483 – Updated, first-draw loan application
Form 2483-C New, first-draw loan applicants using gross income
Form 2483 – SD-C New, second-draw loan applicants using gross income
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