On March 3, 2021, SBA issued an Interim Final Rule (IFR) raising the limit on the amount a self-employed individual could borrow on a Paycheck Protection Program (PPP) loan. The intent of the PPP loan program is to provide relief to America’s small businesses and keep individuals employed. Raising the limit will reduce barriers to accessing the PPP and expand funding among small business owners. PPP loans are available through March 31, 2021.
SBA and Treasury recognized that self-employed individuals incur expenses to stay in operation and keep the owner employed. The PPP loan provides support to help these owners.
The self-employed individual filing a Schedule C (Profit or Loss From Business) can use gross income reported on line 7 of the schedule, rather than net profit (loss) reported on line 31 of the schedule – not to exceed $100,000. The maximum loan amount is $20,833.
For borrowers in the Accommodation and Food Services sector (NAICS code 72), the maximum Second Draw (borrowers that already had a PPP loan) loan is capped at $29,167.
For self-employed individuals with employees, the individual uses the gross income less amounts reported for employee benefit programs (line 14), pension and profit-sharing (line 19, and wages (line 26) of Schedule C up to $100,000.
The self-employed individual can continue to use net profit in calculating the maximum loan amount but using gross income should result in a larger PPP loan. The maximum loan amount is based on the employee payroll costs and the owner’s payroll costs using either the gross or net income.
Self-employed individuals who reported a loss on their Schedule C are now eligible for a PPP loan. This is a significant increase for many self-employed individuals.
The expenses the PPP loan proceeds can be used for have been expanded to include business expenses and owners compensation if the borrower elects to use gross income rather than net income. The maximum is based on the pro-rated 2019 or 2020 expenses.
SBA believes using gross income by self-employed individuals may increase the risk of fraud. This is because gross income increases the maximum loan amount that doesn’t always accurately reflect the extent that the PPP loan is necessary to support the ongoing operations of the applicant’s business.
To mitigate the fraud risk, self-employed individuals who 1) elect to use gross income to calculate its loan amount on a First Draw (first time applicants) PPP loan and 2) reported more than $150,000 in gross income, will not automatically be deemed to have made the statutorily required certification in good faith “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations” of the borrower. The borrower may be subject to a review by SBA of its certification of need.
SBA developed new Borrower Application Forms for self-employed individuals that elect to calculate their loan amount using gross income. SBA Form 2483-C will be used by First Draw PPP loan borrowers and SBA Form 2483-SD-C will be used by Second Draw PPP loan borrowers.
The interim final rule (IFR) is effective regarding PPP loans approved after March 3, 2021. Loans approved previously cannot be increased. Contact your lending institution if you have submitted an application but it hasn’t been approved yet to see how the loan amount can be increased.
The IFR expanded eligibility to obtain a PPP loan to business owners with non-financial fraud felony convictions in the last year and to business owners delinquent or in default on their Federal student loans.
Contact us if you are interested in learning more about the PPP loan program and how it may help your business.