In response to the changes that the Biden-Harris Administration made to the Paycheck Protection Program (PPP) in a press release on February 22, 2021, the U.S. Small Business Administration (SBA) issued new guidance with interim final rule titled “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to Loan Amount Calculation and Eligibility,” late on March 3, 2021. The guidance is related to self-employed individuals who file Form 1040, Schedule C, Profit or Loss from Business and includes information on how to calculate the maximum loan amount for self-employed individuals. It also provided some revisions to implement updates to the PPP to remove the eligibility restrictions that prevent businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans and remove the eligibility restriction that prevents businesses with owners who are delinquent or in default on their Federal student loans from obtaining PPP Loans.
Self-Employed Individuals (Schedule C Filers) Changes
The guidance provided that self-employed individuals who file Schedule C could calculate their maximum PPP loan amount by using either gross income (line 7 of Schedule C) or net profit (line 31 of Schedule C). The change in the maximum loan amount calculation is not retroactive and only applies to loan applications filed on or after March 3, 2021. Loan amounts cannot be increased for the new guidance. Allowing the use of gross income was one way the administration was trying to open doors for larger loans to self-employed individuals who may not record much net profit on their Schedule C due to larger operational fixed overhead costs.
The guidance provides different sets of maximum loan calculation instructions depending on whether the Schedule C filer has no employees or has employees. As a Schedule C filer with no employees, the borrower may choose to calculate its loan amount based on either net profit or gross income. If a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either net profit or gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Schedule C. A more in-depth look at the calculation is provided below.
Schedule C filer with no employees would use the following calculation method:
- Step 1: From your 2019 or 2020 IRS Form 1040, Schedule C, you may elect to use either your line 31 net profit amount or your line 7 gross income amount. (If you are using 2020 to calculate payroll costs and have not yet filed a 2020 return, fill it out and compute the value.) If this amount is over $100,000, reduce it to $100,000. If both your net profit and gross income are zero or less, you are not eligible for a PPP loan.
- Step 2: Calculate the average monthly net profit or gross income amount (divide the amount from Step 1 by 12)
- Step 3: Multiply the average monthly net profit or gross income amount from Step 2 by 2.5. This amount cannot exceed $20,833.
- Step 4: Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID19 loan (because it does not have to be repaid).
Schedule C filer with employees would use the following calculation method:
- Step 1: Compute 2019 or 2020 payroll (using the same year for all items) by adding the following:
- At your election, either (1) the net profit amount from line 31 of your 2019 or 2020 IRS Form 1040, Schedule C, or (2) your 2019 or 2020 gross income minus employee payroll costs, calculated as your gross income reported on IRS Form 1040, Schedule C, line 7, minus your employee payroll costs reported on lines 14, 19, and 26 of IRS Form 1040, Schedule C (for either option, if you are using 2020 amounts and have not yet filed a 2020 return, fill it out and compute the value), up to $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred (if this amount is over $100,000, reduce it to $100,000, or if this amount is less than zero, set this amount at zero);
- 2019 or 2020 gross wages and tips paid to your employees whose principal place of residence is in the United States, computed using 2019 or 2020 IRS Form 941 Taxable Medicare wages & tips (line 5c, Column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred, and any amounts paid to any employee whose principal place of residence is outside the United States; and
- 2019 or 2020 employer contributions to employee group health, life, disability, vision, and dental insurance (portion of IRS Form 1040, Schedule C line 14 attributable to those contributions); retirement contributions (IRS Form 1040, Schedule C, line 19); and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).
- Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12).
- Step 3: Multiply the average monthly amount from Step 2 by 2.5.
- Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).
PPP loan proceeds may be used to cover the following expenses:
- 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.
As a deterrent and to mitigate fraud risk, 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/use the safe harbor provided for borrowers relating to loan necessity. Other borrowers, together with their affiliates, that received PPP loans of less than $2 million can claim the safe harbor on loan necessity. The SBA said it is eliminating the loan necessity safe harbor for these Schedule C borrowers with the situation described above, because they may be more likely to have available sources of liquidity to support their business’s operations than Schedule C filers with lower levels of gross income.
The SBA will be reviewing a sample population of first draw PPP loan applications submitted by Schedule C filers who opted to use 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 that they sign off on when submitting the application.
For additional information on the 32-page IFRs, click here.
Revised or Updated PPP Applications
In conjunction with the new IFRs, the PPP loan applications have been revised and two new applications have been released to implement the IFRs changes. When a Schedule C filer elects to use gross income, they will now need to file either Form 2483-C for first draw applications or Form 2483-SD-C for second draw applications. Links to all these applications can be found below.
For the revised PPP first draw borrower application (Form 2483), click here.
For the revised PPP second draw borrower application (Form 2483-SD), click here.
For the new PPP first draw borrower application for Schedule C Filers Using Gross Income (Form 2483-C), click here.
For the new PPP second draw borrower application for Schedule C Filers Using Gross Income (Form 2483-SD-C), click here.
Updated FAQ Document
The SBA also revised the FAQ document on March 3, 2021 to update the responses with provisions that were passed in the Consolidated Appropriations Act of 2021. The updated FAQs can be found using the link provided below.
Updated PPP FAQs can be found here.