Paycheck Protection Program

On Tuesday, March 3, 2021, the SBA released its anticipated new interim final rule (IFR) as well as new or updated applications, and an updated FAQ document for Paycheck Protection Program Loans.

The IFR now allows Schedule C sole proprietors and independent contractors to calculate their maximum loan amount based on either their 2019 or 2020 gross income and removes the eligibility restrictions for borrowers who have non-financial fraud felony convictions and/or are delinquent on their Federal student loans. These changes apply to both first and second draw PPP loans.

This will open up PPP eligibility to a large number of sole proprietors who previously had little or no net earnings from self-employment. The SBA is implementing this change with respect to PPP loans approved after the effective date of the IFR. Therefore, borrowers with first or second draw loans previously approved by the SBA cannot be increased for the new calculation outlined below. Schedule C filers electing to use gross income will use a new first or second draw borrower application form (Form 2483-C or Form 2483-SD-C).

So what exactly is the new calculation for sole proprietors or independent contractors?

  1. Schedule C filers without employees – borrower may elect to calculate its loan amount on either net profit (line 31 of Schedule C) or gross income (line 7 of Schedule C).
  2. Schedule C filers with employees – borrower may elect to calculate its loan on either net profit or gross income (as described above) less expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages less employment credits) of Schedule C. Lines 14, 19 and 26 represent employee payroll costs and are subtracted from gross income to avoid double-counting these expenses.

Owner compensation using either net profit or gross income is still limited to $100,000. Therefore, for borrowers without employees, PPP loans will be limited to $20,833, or $29,167 for NAICS code 72 borrowers. Borrowers with employees may apply for loans up to $2,000,000.

Borrowers who elect to use 2020 amounts but have not yet filed their 2020 Form 1040 are instructed to compute the values necessary for the application and complete Schedule C, as it is required for the application. Additional documents have been added to the application requirements to substantiate self-employment and proof the borrower was in operation on or around February 15, 2020.

The covered period begins on the date of the loan disbursement and ends on any date selected by the borrower between 8 and 24 weeks after the date of the loan disbursement. For Schedule C filers, the owner compensation replacement  that is eligible for inclusion in the forgiveness calculation is the prorated portion of the borrowers 2019 or 2020 owner compensation (determined by which year was used in the loan application), limited to a maximum amount of $100,000, and based on the number of weeks in the covered period. For example, if a borrower elects to use a 10 week covered period, the maximum amount of owner compensation for a Schedule C filer is $100,000 times 10/52 (approximately 19.23%) or $19,231. Owner compensation is based on either net profit or gross income (use the same basis as the loan application).

Additionally, the IFR outlined for Schedule C filers those expenses eligible to be paid by PPP funds and include the following:

  • Owner compensation (as defined in the previous paragraph).
  • 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 Feb. 15, 2020 (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.

Because the use of gross income may substantially increase the loan amount, the SBA has indicated there is an increased risk of fraud, waste, or abuse. In response to this risk, for such borrowers, the SBA will review a sample of Schedule C’s submitted for PPP loans of $150,000 or more to ensure that the borrower complied with the PPP eligibility criteria, including the good faith loan necessity certification. If the SBA determines that the borrower did not have an adequate basis for the required certification concerning the necessity of the loan request, the SBA may determine that the borrower is not eligible for the loan or forgiveness.

PPP loan applications are being accepted until March 31, 2021. The AICPA has urged Congress to extend the deadline by at least 60 days.

As always, the PPP team at Anderson ZurMuehlen is here to help if you have questions or would like assistance in applying for a PPP loan.

This article was written by Megan Connors, a CPA, CFE, and Shareholder in our Great Falls office.


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