Note: This post has been updated to include new guidance and forms published March 12 and March 18 at the bottom.
On March 3, the Small Business Administration published an interim final rule implementing a new policy President Biden announced several weeks ago: allowing Schedule C filers to receive more financial assistance by revising the Paycheck Protection Program (PPP) loan calculation formula for these applicants. In support of this change, the SBA explains that it is acting within its discretionary authority to “reduce barriers to accessing the PPP and expand funding among the smallest businesses.”
The new rule, which applies to first draw and second draw loan calculations, is summarized below. It should be noted that unless Congress changes the law, the PPP is set to expire March 31.
The new rule provides Schedule C filers with an option to use either net or gross Schedule C income for determining the owner compensation portion of their loan amount.
For those without employees, the calculation is as follows:
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 COVID-19 loan (because it does not have to be repaid).
The loan calculation formula for those with employees is as follows:
Step 1: Compute 2019 or 2020 payroll (using the same year for all items) by adding the following:
Step 2: Calculate the average monthly amount (divide the amount from Step 1 by 12). iii.
Step 3: Multiply the average monthly amount from Step 2 by 2.5. iv. 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).
The guidance explains the new phrase, “proprietor expenses,” as describing the owner’s business expenses and owner compensation, not including employee payroll costs.
SBA is implementing the formula change with respect to first draw and second draw PPP loans that are approved after the effective date of the rule (March 3). The guidance states, “A borrower whose PPP loan has already been approved as of the effective date of this rule cannot increase its PPP loan amount based on the new calculation methodology.” A borrower who has already submitted an application to their lender should consult with their lender immediately to determine whether that application can be withdrawn and a new application filed using the more generous rule.
The rule provides that if a borrower elects to use gross income to calculate the amount of its first draw loan and has more than $150,000 in gross income on line 7 of the Schedule C, the borrower will not be eligible for the loan necessity “safe harbor” provided to many other borrowers.[i] This means that the SBA may review their certification that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” If the agency, after a “sample draw” and review, determines that the borrower lacked an adequate basis for the required certification, it may determine that the borrower was not eligible for the loan, for the loan amount, or for loan forgiveness. The SBA explains that the purpose of this rule is to mitigate the risk of fraud otherwise potentially increased by the use of gross income. SBA states that it is not applying the safe harbor exclusion to second draw loans because those applicants are required to certify that they have realized a reduction in gross receipts in excess of 25 percent from the relevant comparison period.
The guidance affirms that regardless of the method used to calculate the loan amount, forgiveness is capped at 2.5 months’ worth (2.5/12) of an owner-employee or self-employed individual’s 2019 or 2020 compensation (up to a maximum $20,833 per individual in total across all businesses).
The rule also removes the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans. Likewise, it removes the eligibility restriction that prevents businesses with owners who are delinquent or in default on their federal student loans from obtaining PPP loans.These changes apply to both first draw and second draw loans.
In conjunction with the new rule, SBA issued new forms and some updates to the frequently asked questions:
[i] Prior guidance has included a safe harbor providing that any PPP borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
