New More Favorable Paycheck Protection Program (PPP) Rules for Schedule C Filers
Recent changes have been made to the Paycheck Protection Program (PPP) that favorably impact Schedule C filers. These new rules took effect March 3rd and apply prospectively to both PPP first and second draw loans. The changes specifically impact the calculation of the maximum PPP loan amount for sole proprietors (includes single member LLCs), independent contractors and self-employed individuals. Under the new rules, an individual who files an IRS Form 1040, Schedule C can now chose to calculate the maximum loan amount using GROSS income rather than NET profit. Allowing a Schedule C borrower to receive a loan amount based upon their gross business income will provide a borrower a loan amount that is sufficient to meet the borrower's fixed expenses that are necessary to stay in business AND keep the owner employed. A borrower whose PPP loan has already been approved by the SBA cannot increase its PPP loan amount based upon this new calculation methodology.
Additional details are below:
- Borrower can choose to use either their 2019 or 2020 Schedule C (likely select whichever year is higher)
- Borrower can choose to use gross income (line 7) of Schedule C to calculate the 'owner compensation' share of payroll costs.
- The owner compensation share of a Schedule C filer's loan amount is referred to as 'proprietor expenses'. Proprietor expenses include the owner's business expenses and own compensation but do NOT include employee payroll costs.
- Gross income is capped at $100,000 on an annualized basis.
- If a Schedule C borrower does NOT have any employees, the eligible PPP loan amount is calculated as follows:
- Schedule C gross income (capped @ $100K)
- Divided by 12 = monthly payroll
- Multiplied by 2.5 ** = eligible PPP loan (maximum loan amount = $20,833)
- If a Schedule C borrower HAS employees, the Schedule C gross income (still capped @ $100K) must be reduced by the following employee payroll costs:
- Schedule C, line 14 - Employee benefit programs (eg, health insurance)
- Schedule C, line 19 - Pension and profit-sharing plans
- Schedule C, line 26 - Wages
- The eligibility rules for a PPP 2nd draw loan remain unchanged. Namely, a borrower must have experienced a 25% or greater decline in gross receipts for any calendar quarter of 2020 as compared to the same calendar quarter of 2019 to qualify for a 2nd PPP loan.
- As part of the loan application, borrower must make the following certification:
- Borrowers that elect to use gross income to calculate their maximum loan amount for a 1st draw PPP loan AND report more than $150,000 in gross income on the Schedule C that was used to calculate the borrower's loan amount will NOT automatically be deemed to have made the required certification concerning the necessity of the loan request in good faith.
- The PPP loan program is set to expire on March 31, 2021. However, there is proposed legislation in both the House and Senate to extend the PPP loan application date for 60 days until July 31, 2021. We believe it is likely this legislation will pass.
- PPP loans can be completely forgiven provided the loan proceeds are spent on the appropriate items; namely employee payroll costs and proprietor expenses.
- A Schedule C filer can apply for a PPP loan through their existing lender or various online 'fin tech' lenders. The AICPA has partnered with the fin tech lender biz2credit.com to create a CPA loan portal whereby CPA firms can facilitate the PPP loan application and forgiveness process for their clients. Sechrest & Bloom has subscribed to this service. Our experience with biz2credit thus far has been favorable. In this latest round of PPP funding, biz2credit has had more PPP loans approved by the SBA than any other lender in the country.
- Below are links to the recently updated PPP loan applications for Schedule C filers using the gross income method:
SBA Form 2483-SD-C - Second Draw Borrower Application Form for Schedule C Filers Using Gross Income
Please reach out to Jennifer if you have questions about these recent changes to the PPP program or if you would like assistance applying for a PPP loan through biz2credit.com.
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