On March 3, 2021, the Small Business Administration released new Frequently Asked Questions, Interim Final Rules and multiple new forms related to the methodology for calculating the maximum loan amount for sole proprietors who file a Schedule C return to allow these individuals to use gross income to calculate the loan amount.
These changes will significantly impact how sole proprietors can calculate their eligible PPP loan amounts. Sole proprietors that were unable to qualify for PPP loans in 2020, due to net losses reported on their tax returns may now be eligible for PPP loans.
Why did the SBA make these changes?
The initial definition for a self employed person’s “payroll costs” was the net profits reported on Schedule C (Profit or Loss From Business) plus any wages a sole proprietor paid employees. The SBA noted in the Interim Final Rule there were “significant concerns with this definition 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”.
I’ve already applied and received a PPP loan, can I go back and request additional funds under this methodology?
The changes were not made retroactively. Only borrowers that have not had their loans approved or have not applied for PPP1 or PPP2 loans can apply.
My PPP loan is in process and hasn’t been approved. What should I do?
Reach out to your lender and ask them to halt your application as soon as possible.
How do I calculate the loan amount that I’m eligible for?
There are two calculations outlined by the SBA. We have created templates to assist in the calculation process. We recommend you review the calculations in these templates with your advisors prior to submitting your application to your banker and the SBA. In order to complete the calculation, borrowers will need to have a copy of their most recently filed Form 1040 and, if applicable, their payroll records.
If you are a sole proprietor and have employees that you issue forms W-2 to annually use this template.
If you are a sole proprietor and you do not have employees (this does not include subcontractors issued forms 1099-NEC) use this template.
How do I document the certification of need for the PPP funds?
The SBA notes that these changes will “increase the risk for waste, fraud, or abuse, because it will substantially increase the maximum loan amount”. Previously, the SBA had issued a safe harbor for borrowers of loans less than $2 million automatically deeming those below that threshold to have made the good faith certification of need for the funds. In order to mitigate the risk of this new change, any borrowers that report Schedule C gross income in excess of $150,000 will not be allowed to use this safe harbor. Furthermore, the SBA has stated that they will be auditing a sample of loans that fall into this category to determine if borrowers had “other available sources of liquidity to support their business’s operations”. We recommend that any borrowers that elect this methodology craft a memo for their files prior to applying for the loan that includes items such as other sources of funding, projected cashflows, historical performance showing COVID impacts, communications from suppliers and/or customers noting COVID impacts, a list of government orders and mandates that effect the businesses ability to operate in a normal capacity, etc.
How can I use my PPP funds?
In addition to previously allowable expenses (payroll costs, interest, rent to unrelated parties, utilities, and other specific worker protection and supplier costs prescribed by the SBA), the SBA allows the PPP funds to be utilized for:
- Owner compensation if the schedule C net profit was used to calculate the loan amount
- Proprietor expenses (business expenses plus owner compensation) if the schedule C gross profit was used to calculate the loan amount
What other changes were included in this new guidance?
The restrictions related to business owner’s prior non-fraud felony convictions or who are delinquent or in default on federal student loan payments were removed.
How can Mitchell Wiggins help?
This change specifically impacts our clients that may not have the staff or accounting expertise to navigate these complex regulations. This program now has well over 1,000 pages of guidance and laws that dictate the program. We are here to assist you in this process. Mitchell Wiggins has a dedicated team of professionals that are continually monitoring the changes to these programs. We house all of our resources here for your reference and can assist you with PPP forgiveness.