New PPP Rules Benefit Self-Employed | McCarter & English, LLP
Last year, self-employed people who were operating their businesses without any employees could be eligible for a Paycheck Protection Program (P3) loan in an amount equal to approximately 20.8% (2.5 months divided by 12 months) of their 2019 annual net income from their own account. employment not exceeding $ 100,000, or not exceeding $ 20,833 (20.8% of the $ 100,000 cap). Since the calculation of net self-employment income is made after deducting fixed expenses and other business expenses that a small business must cover to stay afloat, the annual net self-employment income can often be a very small number, which which results in an extremely low PPP. Amount of the loan. For example, an annual net self-employment income of $ 5,000 would qualify for a P3 loan of only $ 1,042 (20.8% of $ 5,000). As a result, many sole proprietors who report their net self-employment income on Schedule C of their individual tax return on IRS Form 1040 (Schedule C) have not bothered to apply for PPP loans. In addition, the sole proprietors without employees are 70% women and minorities – underserved groups have sought to be helped by the PPP.
Significantly, earlier this month, the Small Business Administration (“SBA”) released new PPP rules in a new Provisional final rule (the “New IFR”) entitled “Temporary Changes to the Business Loan Program; Paycheck Protection Program – Loan Amount Calculation and Eligibility Revisions ”and in a new Frequently Asked Questions (the “New FAQ”). The new IFR and the new FAQs (collectively the “Revised Rules”) reflect the changes made to PPP by the Consolidated Appropriations Act, 2021 (CAA) and incorporate guidance from the Biden administration to create more PPP funds available to them. self-employed. C by allowing the calculation of PPP loan amounts to be based on gross income rather than net income.
Loan calculation for Schedule C filers (sole proprietors and independent contractors)
The SBA and the US Department of the Treasury have taken up the definition of “labor costs” contained in the CARES Act, which provides, in the relevant part, that “any remuneration or income of a sole proprietor or independent contractor which is salary, commission, income, net earnings from self-employment or similar compensation ”constitutes“ labor costs ”for aAllow sole proprietors to receive the largest PPP loans using their gross income (maximum $ 100,000) instead of net profit. The new IFR allows a Schedule C registrant who has not yet been approved for a first or second draw PPP loan to choose to calculate the owner’s compensation share of their labor costs based on:
- Net profit (as reported on line 31 of Schedule C); Where
- Gross revenue (as indicated on line 7 of Annex C).
- In determining a borrower’s eligible expenses and the amount of the rebate, the new IFR considers the owner’s remuneration portion of a Schedule C filer’s loan amount to be “owner expenses”, which excludes expenses. employee wage costs.
- To avoid double counting, Schedule C filers should subtract the gross income from the following expenses, which represent “employee salary costs”:
- Employee benefit programs reported on line 14 of Schedule C
- Pension and profit-sharing plans as reported on line 19 of Schedule C
- Salary less employment credits as declared on line 26 of Schedule C
- To reduce the risk of increased waste, fraud, or abuse that may arise from using the gross income methodology, “Good Faith Necessity Certification” for PPP loans under $ 2 million does not apply. will not apply to first-draw PPP loans calculated using gross income over $ 150,000, and this certification may be subject to SBA review. However, this safe harbor exclusion will not apply to second-draw PPP loans; an applicant must certify that they achieved a reduction of more than 25% of their quarterly gross receipts compared to the quarterly period of comparison. See FAQ 46.
- Schedule C filers using the ‘gross income test’ should apply for a first draw PPP loan on the new SBA Form 2483-C and new SBA Form 2483-SD-C for a PPP Second Draw loan.
- The new IFR also removes eligibility restrictions that prevented PPP loans from going to small business owners who have previously been convicted of a non-fraudulent crime (fraud, bribery, embezzlement, or misrepresentation in a loan application or request for federal assistance) and who are in arrears on their student loans.
PPP eligibility enhancements
The new IFR removes some eligibility restrictions and allows more small businesses to qualify for P3 loans, including (a) small business owners who are late or in default on federal student loans and (b) small business owners who, within the past year, have been convicted, pleaded guilty or have commenced any form of parole or probation for a crime not involving financial fraud. A five-year retrospective always applies to financial crimes involving fraud, corruption, embezzlement, or misrepresentation on a loan application or financial aid application.
Additional PPP clarifications
- A sole proprietor, self-employed person, or independent contractor who has an Individual Tax Identification Number (ITIN) can use the ITIN on borrower application forms (SBA 2483 Forms, 2483-C, 2483-SD, and 2433-SD-C, or the lender’s equivalent) for a PPP loan and forms to request a loan forgiveness (SBA 3508 Forms, 3508EZ, and 3508S, or the lender’s equivalent) instead of a social security number (SSN). See FAQ 64.
Borrowers who have received a First Draw PPP Loan or a Second Draw PPP Loan can apply for the Employee Retention Credit. However, salary costs that are salaries qualified for employee retention credit should not be paid with the proceeds of a PPP loan or claimed as “salary costs” eligible for cancellation of the PPP loan.
- Eligible salaries used for the retention credit cannot be claimed as “salary costs” as part of a PPP loan cancellation request. Borrowers should separate and specifically identify the salary costs that are claimed as “eligible salaries” for the retention credit and the salary costs that are funded by the proceeds of the PPP loan and that are eligible for loan cancellation. FAQ 65.
- Lenders have the following options to assist Schedule C filers who wish to use the gross income methodology to calculate PPP loan amounts but have already submitted PPP loan applications. FAQ 66.
- If the lender has received but has not submitted a loan guarantee request for the Schedule C applicant, the applicant must submit to the lender the SBA 2483-C form for a first-draw PPP loan or the SBA 2483 form. -SD-C for a second run PPP. loan, and the lender must then submit a loan guarantee application to the SBA using SBA Form 2484 (revised 3/21) for a PPP First Draw loan or SBA Form 2484-SD (revised 3/21) for a PPP Second Draw loan.
- If the lender has submitted a loan guarantee request and the loan guarantee request has not yet been approved, the lender can withdraw the loan guarantee request and resubmit a loan guarantee request after receipt by the requester of Form SBA 2483-C for a first-run PPP. loan or SBA form 2483-SD-C for a second draw PPP loan. The lender must then submit a loan guarantee application to the SBA using Form SBA 2484 (revised 3/21) for a first-draw PPP loan or Form SBA 2484-SD (revised 3/21) for a second-draw PPP loan upon resubmission of loan guarantee. asks the ASB.
- If the SBA has issued a loan number but the loan has not yet been disbursed, the lender can cancel the loan in E-Trans Servicing, and the applicant can apply for a new loan using SBA Form 2483-C to a first-draw PPP loan or Form SBA 2483-SD-C for a second-draw PPP loan.
- If the lender has disbursed the loan but has not filed the related Form 1502 Loan Disbursement Report, the applicant must repay the PPP loan in full, the lender must cancel the loan in E-Trans Servicing, and the applicant can request a new loan using Form SBA 2483-C for a first draw PPP loan or SBA form 2483-SD-C for a second draw PPP loan.
- If the lender has disbursed the loan and filed the related Form 1502 Loan Disbursement Report, no changes can be made to the calculation of the loan amount.