SBA dramatically increases PPP loan amount eligibility for new Schedule C borrowers

If you are a sole proprietor or owner of a very small business, the way you calculate how much you can borrow through the Paycheck Protection Program (P3) has improved a lot. Last night, the SBA released additional guidance on the Biden-Harris administration’s PPP overhaul. Now, an Interim Final Rule (IFR) specifies that Schedule C filers can use gross income rather than net income, as previously specified. They have also released new apps for First Drawdown Borrowers and Second Drawdown Borrowers. Here’s an overview of what’s new.

The updated calculation

You may have heard of sole proprietorships who get loans for just a few dollars in the first round of P3 financing. It was hardly worth applying. The interim final rule corrects this by allowing people who file an IRS Schedule C form to calculate their maximum loan amount using gross income. In the IFR, the SBA indicates that employment support for sole proprietorships includes coverage of business expenses as well as net profits. He added that “this change would affect many sole proprietors who have been effectively excluded from the PPP, especially those with very low or negative bottom lines, many of whom are located in underserved communities.” SBA data shows that businesses with no employees are 70% owned by women and minorities, compared to 40% for businesses with employees.

It’s also worth noting that the IFR has changed the eligibility rules to allow more small business owners to apply. Now, entrepreneurs who have previously been convicted of a crime without fraud or who default or default on federal student loans can take advantage of P3 funding.

Calculation of the amount

How much can you borrow under the new rules? Start with the gross income you report on line 7 of your Schedule C. If you have no employees, you just put your gross income from line 7 on your Schedule C, divide that number by 12, if that number exceeds $ 8,333.33 then enter $ 8,333.33 and then multiply that amount by 2.5 to get your loan amount.

If you have employees, you take the gross income amount from line 7, then subtract the sum from line 14 (benefit programs), line 19 (retirement or incentive plans) and the line 26 (wages). This number is divided by 12. If it is greater than $ 8,333.33, you put $ 8,333.33. Next, you calculate the average monthly payroll for non-owner employees, add them up and then multiply by 2.5.

Note that if you are a qualifying joint venture for federal income tax purposes, that is, you and your spouse are married, complete a Schedule C, both participate in the business activity and choose not to be treated as a partnership – only a spouse can submit the form on behalf of the qualifying joint venture. When reporting the number of employees, you must count both spouses. But for the purpose of determining which table to use to calculate the loan application amount, if you have no employees other than you and your spouse, you complete the table titled “If you have no other employees. that yourself, fill in this table ”. For the purposes of calculating gross income, enter the sum of the gross income (Schedule C, line 7) of both spouses.

The total loan amount that covers the homeowner’s compensation will still not exceed $ 20,833, the maximum loan amount for borrowers previously. The maximum loan amount also includes economic disaster loans made between January 31, 2020 and April 3, 2020 (excluding EIDL advance).

For the purposes of forgiveness, salary costs refer to “owner’s expenses” which includes the owner’s business expenses and own compensation, but not employee salary costs (i.e. you should always check what the owner’s funds will be used for. ready.

Documentation required with the loan

To justify the amount of the loan requested, you must provide:

  • A copy of your 2019 or 2020 Schedule C
  • 2019 1099-Miscellaneous received for box 7 or 2020 1099-NEC received for box 7
  • Invoice, bank statement or a ledger that establishes that you are self-employed.
  • If you have employees, Form 941 (or equivalent payment processor records and quarterly wage unemployment tax forms (or equivalent payment processor records)
  • A 2020 invoice, a bank statement from the registration book to establish that you were in business on or around February 15, 2020.

Words of caution

One of the big questions about the upcoming changes was whether the changes would be retroactive. Many Annex C filers have already applied for loans. The SBA has made it clear that the change only applies to loans approved after the effective date of the IFR (March 3, 2021) and that loans already approved on the effective date cannot not increase the loan amount based on the new calculation methodology.

In addition, you still need to do 10 certifications regarding the loan, including the certification “The current economic uncertainty makes this loan application necessary to support the applicant’s ongoing operations”. With the change in calculation and the substantial increase in loan amounts, the SBA hopes to mitigate the risk of fraud by examining a sample of the population of early PPP loans issued to Schedule C filers seeking loans with income. gross over $ 150,000. The review will assess whether these borrowers have complied with the PPP eligibility criteria, including certification of the need for a good faith loan.

The new rules are definitely good news for those who haven’t borrowed for the first or second time yet. However, given that we are already in the last three weeks of the last PPP cycle, this will likely have a limited impact. Many companies have already applied. As of February 28, the program had approved more than 2.1 million loans in 2021 and more than 7.3 million loans in total. Plus, as always, banks will need to implement these changes quickly, and many were already closing application deadlines earlier. It seems even more problematic. The American Institute of CPAs (AICPA) has asked Congress for at least 60 more days for loans, but this has not been addressed at this point. Stay tuned.

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