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SBA Issues Revised PPP Loan Guidance for Self-Employed Individuals

As we expected and reported in a previous blog post, the Small Business Administration (SBA) issued revised guidance on Wednesday evening for Paycheck Protection Program (PPP) loans for self-employed individuals who file Form 1040, Schedule C, Profit or Loss from Business, regarding their maximum loan amount by allowing these filers to calculate their loans using gross income instead of net profit.

Reason for the Change

Previously, PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule C as payroll costs (if employees exist) plus net profits, which is net earnings from self-employment. According to the Interim Final Rule (IFR), issued Wednesday evening, the SBA felt that this definition did not take into account fixed and other business expenses that a small business must cover to stay in operation and therefore keep the owner employed. Thus, the support for employment for sole proprietors includes covering business expenses, as well as net profits. Because of this, the SBA determined that changing the calculation for sole proprietors, independent contractors, and self-employed individuals will reduce barriers to accessing the PPP and expanded funding amongst the smallest businesses.

Calculating Loan Amount – No Employees

Employed individuals who file a Schedule C may elect to calculate the owner compensation share of its payroll costs—that is, the share of its payroll costs that represents compensation of the owner—based on either (i) net profit or (ii) gross income. Gross income is the amount the borrower reports on line 7 of Schedule C. Guidance on loan amounts stays consistent with previous guidance, capping gross or net profits at $100,000 with a qualified loan amount of $20,833 or 2.5 times the average monthly gross or net profit calculated.

Calculating Loan Amount – Employees

If a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either (i) net profit or (ii) gross income, minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of IRS Form 1040, Schedule C. Expenses reported on lines 14, 19, and 26 of the IRS Form 1040, Schedule C represent employee payroll costs and are subtracted from the owner compensation share of payroll costs if the owner uses gross income to calculate its loan amount in order to avoid double-counting these costs. Employee compensation guidance for calculation of the loan amount is consistent with other PPP guidance on employee compensation, in which employees gross compensation is capped at $100,000. Various employer paid health, dental, and vision insurance, as well as state unemployment insurance tax (SUTA), are to be included as well. The loan amount is then calculated based upon 2.5 times the average monthly cost of the above.

In the context of determining a borrower’s eligible expenses and forgiveness amount, this IFR refers to the owner compensation share of a Schedule C filer’s loan amount as “proprietor expenses.” Proprietor expenses encompass an owner’s business expenses and owner compensation, but do not include employee payroll costs. This proprietor expenses calculation limits a Schedule C filer that included employee payroll costs in determining the PPP loan amount from taking the full loan amount as owner compensation. This promotes Congress’ goal of keeping workers paid and employed.

PPP Proceed Use

Self-employed individuals who file IRS Form 1040, Schedule C may use their PPP proceeds to cover the following:

  • Owner compensation (if net profit is used) or proprietor expenses (business expenses plus owner compensation if gross income used).
  • Employee payroll costs.
  • Mortgage interest payments.
  • Business rent payments.
  • Business utility payments (for borrowers entitled to claim a deduction for such expenses on their 2019 or 2020 Schedule C, depending on which one was used to calculate the loan amount).
  • Interest payments on any other debt incurred before Feb. 15, 2020 (these are not eligible for PPP loan forgiveness).
  • Covered operations expenditures, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C.
  • Covered property damage costs, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C.
  • Covered supplier costs, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C.
  • Covered worker protection expenditures, as defined in Section 7A(a) of the Small Business Act, to the extent they are deductible on Schedule C.

New Forms for Borrowers

Along with the announced changes to the PPP, the SBA issued revised forms to incorporate these announced changes:

  • Updated PPP borrower first-draw (Form 2483) application form.
  • Updated PPP borrower second-draw (Form 2483-SD) application form.
  • New PPP first-draw (Form 2483-C) borrower application forms for Schedule C filers using gross income.
  • New PPP second-draw (Form 2483-SD-C) borrower application forms for Schedule C filers using gross income.

Elimination of Loan Necessity Safe Harbor

To mitigate the risk of fraud, a Schedule C filer that reports more than $150,000 gross income to calculate its first-draw PPP loan will not be able to claim the safe harbor provided for borrowers that, together with their affiliates, received PPP loans of less than $2 million. The SBA said it is eliminating the loan necessity safe harbor for these borrowers because they may be more likely to have other available sources of liquidity to support their business’s operations than Schedule C filers with lower levels of gross income.

The SBA will review a sample of the population of first-draw PPP loans made to Schedule C filers using the gross income calculation if the gross income on the Schedule C used to calculate the borrower’s loan amount exceeds the $150,000 threshold. The review will assess whether these borrowers complied with the PPP eligibility criteria, including the good faith loan necessity certification.

Other Guidance Modifications

The SBA also announced with the issued IFR the following:

  • Updated eligibility rules to remove restrictions preventing PPP loans going to small business owners with prior nonfraud felony convictions.
  • Updated rules to allow those with who are delinquent or in default on federal student loan payments eligibility to apply for PPP funding.

The changes announced through this issued IFR are NOT retroactive, unlike previous changes and modifications to the PPP. The SBA and Treasury have ruled that borrowers whose PPP loan has already been approved cannot increase their loan amount based on the revisions and guidance modifications noted above.

If you have any questions regarding this revised guidance, please contact David B. Blain, CPA, CVA – Partner and Director of Entrepreneurial Services with McKonly & Asbury at dblain@macpas.com.

Questions on submitting your PPP loan application or the forgiveness process?

Our team stands ready to assist you through the PPP loan application and forgiveness process. Do not go at it alone. Ensure you are submitting the right information and receiving the highest forgiveness amount possible. Visit our PPP Loan Consulting webpage by clicking here to request assistance or support.

 

About the Author

David Blain

David is a Partner with McKonly & Asbury. He has a diverse background with experience in both private industry and public accounting, having worked for five years for an international public accounting firm and five years in private i… Read more

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