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SBA Opens PPP Loans to Schedule C Filers

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In early March, the SBA announced it was halting the processing of PPP Loan Draw 2 applications for applicants with more than 20 employees for a two week period.  During that time it was providing exclusively to businesses with less than 20 employees to process their PPP Loan applications. The two week period started on Wednesday, February 25th and ends on Tuesday, March 9th, 2021.  

This was welcome news for many small business owners.  

And in the middle of the two-week exclusivity period for small business owners applications — on March 3, 2021 — the SBA released its latest ‘Interim Final Rule’ covering the new way business owners who operate as a sole proprietorship or single member LLC and prepare their federal taxes using a Schedule C may calculate their PPP Loan request.  

The changes were significant and meant that most Schedule C filers will be eligible for substantially more PPP Loan proceeds.  

Up until now, the PPP Loan proceeds for Schedule C filers was based on the 2019 net profit (referred to as the net earnings from self employment) plus payroll costs if employees worked in the business.  The Interim Final Rule (IFR) effective on March 3, 2021 allows a business owner to use either their gross income or net income as the basis to compute its PPP Loan request amount.

According to the SBA’s latest IFR, “the change is meant to help business owners who report their income and expenses on a Federal Schedule C meet its fixed expenses so they may stay in business and keep the owner employed”.

The new rules only apply for a borrower whose PPP Loan has not been approved as of the effective date of the IFR, on March 3rd, 2021.

Regardless of the number of employees a business employs, the SBA PPP Loan applications will close on March 31, 2021.

As of the date of this writing, less than three weeks remain for small business owners to digest the latest IFR and prepare their PPP Loan application which is a tall order.  Many business owners will need the assistance of their tax preparers to ensure they’ve applied in an accurate manner and it’s the middle of tax season crunch time!  

For these reasons, there are many organizations and taxpayers alike, pleading with congress and the SBA to extend the PPP Loan application deadline beyond March 31, 2021. 

How to Calculate your PPP Loan request under the latest IFR depends on whether your business has employees or not.

How to Calculate your PPP Loan Request if you Do Not Have Employees

You may use your Federal Schedule C from 2019 or 2020.  It’s your choice.

You may choose your line 31 Net Profit Amount or line 7 Gross Income Amount, as long as the amount you choose does not exceed $100,000.  

If both gross income and net profit are zero or less, you may not apply for the PPP Loan.  

Divide the amount you choose to use by 12 and then 

Multiply that amount by 2.5.  The result may not exceed $20,833.

Add any amount of EIDL made between January 31, 2020 and April 3, 2020 you want to refinance.  This EIDL program is not the EIDL Covid 19 Loan program.  The EIDL Covid 19 Loan program is not eligible for refinancing in the PPP Loan program.

The documents required to substantiate the PPP Loan request include the 2019 or 2020 Federal Schedule C, any IRS Form 1099-MISC received which were reported on the Schedule C, and records that indicate you were self-employed such as invoices, bank statements, accounting records, etc.

You will also need to provide documentation to substantiate you were in business on February 15, 2020.  Again, an invoice or bank statement covering this period should be sufficient.


How to Calculate your PPP Loan Request if you Have Employees


You may use either Federal Schedule C from 2019 or 2020.  Again, it’s your choice.

Take your Gross Income (line 7) and subtract:

Employee Benefit Programs (line 14)

Pension or Profit Sharing Plans (line 19)

Wages (line 26)

Take this sum and compare it to $100,000.  If it’s more than $100,000., your maximum PPP Loan Request amount is $20,833 ($100,000 / 12 months x 2.5).  If it’s less than $100,000, carry forward that amount to the next step.

Compute your employees total payroll costs:

To do so, remove any payroll, employee benefits programs payments and pension or profit sharing plan payments made by the business for the business owner’s benefit.

Add the amount carried forward above to the employee total payroll costs.  Divide this amount by 12 and then multiply it by 2.5.  The amount may not exceed $20,833., which is the maximum amount of PPP Loan request available to a Schedule C filer under the new IRF.  

The documents required to substantiate the PPP Loan request are the same as noted above for the Schedule C Filers who do not have employees, with one exception.  The applicant will have to submit its federal quarterly form 941 and state quarterly unemployment tax returns or its payroll processor records, health insurance and retirement plan paid invoices as well.

Other PPP Loan Applicant Changes for Self Employed Schedule C Filers

In addition to changes to how a Schedule C filer calculates their maximum PPP Loan request, the IFR removes two other barriers for small business owners.  The IFR waives the restriction that prevented business owners with non-financial fraud felony convictions in the last year as well as business owners who were delinquent or in default on their federal student loans from applying for the PPP Loan.  


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