To Our Valued Clients and Friends:

On Wednesday, March 3, 2021, the United States Small Business Administration (SBA) released a new Interim Final Rule (IFR) governing Paycheck Protection Program (PPP) loans for self-employed persons who file a  Schedule C with their individual income tax returns. Such self-employed individuals now may use gross income, from either their 2019 or 2020 Schedule C, rather than net profit, to calculate the loan amount they are eligible for.

Previous guidance held that for individuals filing Schedule C, loans were to cover payroll costs only, defined as the total of employee compensation if the Schedule C business has employees besides the owner, and net profit, representing self-employment earnings. 

The new IFR acknowledges that the prior definition failed to consider fixed and other necessary business expenses, which ought to be considered.

If a self-employed PPP loan applicant has no employees, s/he can calculate the loan amount based on either gross or net income (for most, the former will be more beneficial, naturally!).

If the applicant has additional employees, s/he can calculate the loan amount based upon:

• Payroll costs (gross wages, employee benefit programs such as employer-paid health insurance, and retirement plans), and
• Proprietor’s expenses (formerly ‘owner compensation’), based either upon 1) net income, or 2) gross income minus costs reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages).

Schedule C expenses newly eligible for loan calculations and forgiveness:

• Mortgage interest payments
• Business rent payments
• Business utility payments, if these are deductible on Schedule C
• Covered operations expenditures, to the extent they are deductible on Schedule C
• Covered property damage costs deductible on Schedule C
• Covered supplier costs deductible on Schedule C
• Covered worker protection expenses deductible on Schedule C

However, if using gross income for loan calculations results in a loan amount greater than $150,000, then the borrower will not automatically be deemed to have made the required good-faith certification and may be subject to review by the SBA.

The safe-harbor limit for non-self-employed borrowers to be deemed to have certified their need in good-faith is $2 million. The SBA considers that the self-employed may be more likely than others to have issues with liquidity.

Also, the new IFR allows businesses whose owners have non-fraud felony convictions within the past year to apply for PPP loans – for which they were previously ineligible.

The new guidance applies to both First and Second Round PPP loans – as long as the application is dated after the issuance of this IFR.

New and updated forms:

• Updated PPP Round I Form 2483.
• Updated PPP Round II Form 2483-SD.
• New PPP Round I Form 2483-C for Schedule C applicants.
• New PPP Round II Form 2483-SD-C for Schedule C applicants.

While the window to apply for PPP Round I or Round II loans is set to expire on March 31, 2021, on March 16, the U.S. House of Representatives passed a bill to extend this window through May 31, 2021. The Senate passed the measure on March 27, 2021; President Biden is expected to sign the legislation.

Stay tuned – we will continue to monitor the PPP and the SBA’s ever-changing guidance.

If you have questions on whether you should apply for a PPP loan, either Round I or Round II, and how to best navigate the process, please click here to email us directly – we are here to help.

Until next Wednesday –

Peace,

Eric