To Our Valued Clients and Associates,
As we mentioned earlier this week, the SBA was going to be issuing guidance on the revised PPP loan calculation for Schedule C filers. Today, that guidance has been issued via an Interim Final Rule (IFR) and an updated PPP loan application form.
The new loan application is appropriately titled “Borrower Application Form for Schedule C Filers Using Gross Income” and can be accessed here. Previously, Schedule C filers without employees were limited to only using the net profit from Schedule C to calculate their PPP loan amount. This led to many small businesses being limited or left out completely from the PPP. In its Interim Final Rule, accessible here, the SBA notes they were aware of issues with the prior calculation “because it does not take into account fixed and other business expenses that a small business must cover to stay in operation and therefore keep the owner employed. Thus, the support for employment for sole proprietors includes covering business expenses as well as net profits.”
The new form provides two different ways to calculate your PPP loan depending on whether you have employees or not. For Schedule C filers who have employees, your PPP loan is calculated taking the amount from Line 7 of Schedule C, minus the sum of lines 14, 19, and 26 and dividing that total by 12. There has been no change to the $100,000 cap, so this total is limited to $8,333.33. You would then add to this amount the average monthly payroll for employees and then multiply that total by 2.5.
For Schedule C filers without employees, your maximum PPP loan is Line 7 divided by 12 (again, capped at $8,333.33) multiplied by 2.5.
This is a substantial win for small business filers who were otherwise limited by their net profit. In the case of a Schedule C filer with $100,000 of gross income on their Schedule C but a net profit after expenses of only $20,000, this translates into an additional $16,667 of PPP loan proceeds.
There is a catch for those Schedule C filers who are applying for a First Draw PPP loan and it comes straight from the Interim Final Rules – the SBA is aware that using gross income could lead to fraud and waste and they have indicated in the IFR “the use of gross income by Schedule C filers may, in some cases, increase the risk of waste, fraud, or abuse, because it will substantially increase the maximum loan amount for relevant applicants, and in some cases an applicant’s gross income may not accurately reflect the extent to which a PPP loan is necessary to support the ongoing operations of the applicant’s business. To mitigate this risk, if a Schedule C filer elects to use gross income to calculate its loan amount on a First Draw PPP Loan and the borrower reported more than $150,000 in gross income on the Schedule C that was used to calculate the borrower’s loan amount, the borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith, and the borrower may be subject to a review by SBA of its certification.” This increased scrutiny does not apply to Second Draw PPP loans since applicants have to certify they realized a reduction in gross receipts of more than 25% in order to obtain the Second Draw PPP.
As always, we will advise you of any additional guidance as it becomes known. If you have any questions, please contact us directly.