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PPP Update – Revision to Loan Amount Calculations for Sole Proprietors, Independent Contractors and Schedule C Filers; Increased Eligibility for PPP Loans

Gregory Pfeuffer

March 08, 2021

On March 3, 2021, the SBA released 13 CFR Part 120 (Docket Number SBA-2021-0010), an interim final rule providing revisions to loan amount calculations and eligibility for the Paycheck Protection Program, as well as updated Frequently Asked Questions.

The latest interim final rule:

  • Allows individuals who file an IRS Form 1040, Schedule C to calculate their maximum loan amount using gross income;
  • Removes the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans; and
  • 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 PPP Loans and Second Draw PPP Loans.

The updated Frequently Asked Questions provides additional clarity to these topics:

  • Lobbying activities by PPP recipients;
  • The impact of a borrower’s bankruptcy on loan forgiveness and eligibility for a second draw loan;
  • Eligibility for second draw loans based on the use of first draw proceeds;
  • Applicability of SBA size standards to second draw loan applications; and
  • The interplay of receipt of PPP loans and eligibility for the Employee Retention Tax Credit. 

A summary of the key points of the interim final rule as follows:

  • The definition of primary basis for calculating PPP loan amounts for sole proprietors and independent contractors, payroll costs, now includes both “income” as well as “net earnings from self-employment.” The term payroll costs may now be construed broadly to encompass a borrower’s net income and a borrower’s gross income. Unfortunately, borrowers 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.
  • Schedule C filers may elect to calculate the owner compensation share of its payroll costs on either (i) net profit or (ii) gross income, as calculated under the rule. Gross income is the amount the borrower reports on line 7 of Schedule C.
  • If a Schedule C filer has no employees, the borrower may elect simply 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 (i) net profit or (ii) gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of IRS Form 1040, Schedule C. Expenses reported on lines 14, 19, and 26 of the IRS Form 1040, Schedule C represent employee payroll costs and are subtracted from the owner compensation share of payroll costs if the owner uses gross income to calculate its loan amount in order to avoid double counting these costs.
  • The calculation of employee and owner payroll costs for determining the average monthly payroll used for calculating PPP loan amounts remains capped at $100,000 on an annualized basis.
  • The safe harbor concerning the certification of the necessity of the loan request that SBA previously provided for borrowers that, together with their affiliates, receive PPP Loans with an original principal amount of less than $2 million, will not apply to Schedule C filers that elect to use gross income to calculate their loan amount on a First Draw PPP Loan if they report more than $150,000 in gross income on the Schedule C that was used to calculate the borrower’s loan amount.
  • SBA has determined that the one-year lookback restriction related to non-financial fraud felonies should be removed and only the five-year lookback restriction for those felonies involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance will limit an applicant’s eligibility for the PPP.
  • Prior to this new interim final rule, the consolidated interim final rule states that a PPP loan applicant is ineligible for a PPP loan if the applicant, or any business owned or controlled by the applicant or any of its owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government. Under this new interim final rule, SBA, in consultation with Treasury, has decided to eliminate the restriction in the consolidated interim final rule to the extent it applies to Federal student loans.

Please contact our team for additional information on the Paycheck Protection Program.

For additional details on the SBA interim final rule, click here.

For the updated Frequently Asked Questions, click here.

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