Big Change to PPP Loan Rules for the Self-Employed
Within the past week, the Small Business Administration (SBA) issued new Paycheck Protection Program (PPP) rules that could dramatically increase the amount of a PPP loan a self-employed (SE) individual might obtain. They did this by allowing SE borrowers to calculate their maximum loan amount using their gross revenue rather using net income, as was previously required.
The change opens the door for larger loans to self-employed individuals, many of whom don't record much, if any, net profit on their Schedule C.
The change is contained in a 32-page interim final rule (IFR) published late last Wednesday by the SBA, which administers the PPP in partnership with the US Treasury. In addition to the new rules, the SBA also released an updated set of frequently asked questions and six updated or new application forms, which you can find at sba.gov.
While the new rule, called "Business Loan Program Temporary Changes; Paycheck Protection Program — Revisions to Loan Amount Calculation and Eligibility," revises the maximum loan calculations for sole proprietors, the change is not retroactive. The SBA and Treasury says that borrowers whose PPP loans already have been approved cannot increase their loan amount based on the new methodology, a somewhat controversial ruling. This controversial conclusion seems highly inequitable, and is being challenged by our accounting association, the AICPA, as well as others.
Be that as it may, the new IFR allows Schedule C filers who have yet to be approved for a PPP first- or second-draw loan in the current program, commonly referred to as the PPP2, to elect to calculate the owner compensation share of its payroll costs based on either net profit (as reported on line 31 of Schedule C) or gross income (as reported on line 7 of Schedule C).
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 income or gross revenue minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages) of Schedule C. If a Schedule C filer has no employees, the borrower may simply choose to calculate its loan amount based on either net income or gross revenue.
The IFR provides different sets of maximum loan calculation instructions for Schedule C filers with no employees and for those with employees. These borrowers 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 February 15, 2020 (but 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.
In a fraud risk mitigation effort, the SBA somewhat surprisingly stated that 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 loan necessity safe harbor provided for borrowers that, together with their affiliates, received PPP loans of less than $2 million. Borrowers covered by this safe harbor can rest knowing that the SBA won't review documentation that supports that the loan was necessary due to economic necessity or uncertainty.
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 lack of a safe harbor doesn't mean you shouldn't apply for the loan if needed, just be sure to document why the loan is a necessity and the lack of other available resources, and have that documentation ready of the SBA wants to review it.
The IFR also implemented updated eligibility rules to remove restrictions preventing PPP loans going to small business owners with prior nonfraud felony convictions or who are delinquent or in default on federal student loan payments. These changes are reflected on the updated PPP borrower forms for first and second draws.
The current PPP2 application period is scheduled to end on March 31, 2021. Because there has been a problem with processing and other delays in implementing PPP2, as well as a continuing lack of guidance on certain crucial issues, the AICPA has advocated to Congress to extend the PPP application period by at least 60 days, an extension that is badly needed.