On March 3, 2021, the U.S. Small Business Administration (SBA) issued new Paycheck Protection Program (PPP) rules for self-employed Schedule C borrowers. Click here to view the full 32-page document on the SBA website.
The new regulations have changed how self-employed borrowers can calculate their PPP loan amount. Self-employed borrowers can now calculate their loan using gross income as opposed to net income on their Schedule C. The SBA recognized the previous definition was leaving out businesses with low or negative net profits. By allowing the loan based on gross income, it will provide a self-employed borrower a loan amount that is sufficient to meet their fixed expenses in order to stay in business.
This change is not retroactive. If a borrower has already been approved for a PPP loan, they cannot increase their PPP loan based on the new methodology. If both gross income and net profit is less than zero, the borrower is not eligible for the program.
Under the new regulations a self-employed borrower would calculate the owner’s compensation portion of the PPP loan as follows:
No Employees:
- Use either gross income (line 7 of Schedule C) or net profits (line 31 of Schedule C) from Schedule C 2019 or 2020; amount still limited to $100,000.
- Determine average monthly net profit or gross income by dividing the prior step by 12 * 2.5 not to exceed $20,833.
Borrower has Employees:
- Net profit (line 31 Schedule C), or
- 2019 or 2020 gross income (line 7 of Schedule C) minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) from Schedule C. Subtracting the employee costs eliminates double counting of employee payroll costs. Maximum amount of eligible partner compensation is still limited to $100,000.
To mitigate fraud, if a borrower is using the gross income method and gross income is more than $150,000, the borrower may be subject to a review by the SBA. The safe harbor that SBA previously applied to borrowers that, together with their affiliates, received PPP Loans with an original principal amount of less than $2M, will not apply to Schedule C filers using this method.
If you need assistance or have any questions on the PPP loan calculations, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford), or email us at info@cironefriedberg.com.
