PPP borrowers can use gross income, SBA rules
The U.S. Small Business Administration (SBA) has released new Paycheck Protection Program (PPP) rules that allow self-employed workers who complete Form 1040, Schedule C, Business profit or loss, to calculate their maximum loan amount using gross income instead of net profit.
The change opens the door to larger loans to the self-employed, many of whom are not seeing much, if any, net profit on their Schedule C.
The change in calculation is detailed in a 32-page provisional final rule published late Wednesday afternoon by the SBA, which administers the PPP in partnership with the Treasury. The SBA has also released an updated set of frequently asked questions and six updated or new application forms, as follows.
- Updated first drawdown (form 2483) and second drawdown (2483-SD form) request forms for PPP borrowers.
- New PPP First Drawdown (Form 2483-C) and Second Draw (Form 2483-SD-C) borrower application forms for Schedule C filers using gross income.
- A revised Lender Application Form for PPP Loan Guarantee (Form 2484)
- A revised PPP Second Drawdown Lender Application Form (2484-SD)
AICPA leaders will discuss the SBA guidelines, new forms and FAQs at an online town hall that begins at 3 p.m. ET on Thursday.
The new IFR
The Interim Final Rule, titled âTemporary Changes to the Business Loan Program; Paycheck Protection Program – Loan Amount and Eligibility Calculation Revisions, ‘revises maximum loan calculations for Sole Proprietorships filing Schedule C returns, but change is not retroactive . The SBA and the Treasury have decided that borrowers whose PPP loans have already been approved cannot increase their loan amount based on the new methodology.
The new IFR allows a Schedule C registrant who has not yet been approved for a PPP first or second draw loan in the current $ 284.5 billion phase of the program to choose to calculate the share of compensation of the owner of its labor costs based on profit (as shown on line 31 of Schedule C) or gross income (as reported on line 7 of Schedule C).
If a Schedule C filer has employees, the borrower can choose to calculate the owner’s compensation share of their labor costs based on net profit or gross income less expenses reported in lines 14 (benefit programs social), 19 (retirement and profit-sharing schemes). ) and 26 (wages (less job credits)) of Schedule C. If a Schedule C filer has no employees, the borrower can simply choose to calculate their loan amount by depending on net profit or gross income.
The IFR provides different sets of maximum loan calculation instructions for Schedule C filers without employees (see pages 10 to 11 of the PDF) and with employees (see pages 11 to 13). These borrowers can use the proceeds of their PPP to cover the following:
- Owner’s compensation (if net profit is used) or owner’s expenses (business expenses plus owner’s compensation if gross income is used).
- Employee salary costs.
- Mortgage interest payments.
- Commercial rent payments.
- Commercial utility payments (for borrowers who are eligible to claim a deduction for these expenses on their 2019 or 2020 Schedule C, whichever was used to calculate the loan amount).
- Interest payments on any other debt contracted before February 15, 2020 (these are not eligible for cancellation of the PPP loan).
- Covered operating expenses, as defined in Section 7A (a) of the Small Business Act, to the extent that they are deductible in Schedule C.
- Costs of covered property damage, as defined in Section 7A (a) of the Small Business Act, to the extent that they are deductible in Schedule C.
- Supplier Costs Covered, as defined in Section 7A (a) of the Small Business Act, to the extent that they are deductible in Schedule C.
- Covered worker protection expenses, as defined in Section 7A (a) of the Small Business Act, to the extent that they are deductible in Schedule C.
To mitigate the risk of fraud, a Schedule C filer who reports gross income over $ 150,000 to calculate their first-draw PPP loan will not be able to claim the safe harbor provided for borrowers who, along with their affiliates , have received PPP loans of less than over $ 2 million. The SBA said it eliminates the need for a safe haven loan for these borrowers because they may be more likely to have other sources of cash available to support their business operations than Schedule C filers. with lower gross income levels.
The SBA will review a sample of the population of first PPP loans made to Schedule C filers using the gross income calculation if the gross income from Schedule C used to calculate the borrower’s loan amount exceeds the threshold. of $ 150,000. The review will assess whether these borrowers have complied with the PPP eligibility criteria, including certification of the need for a good faith loan.
The IFR has also implemented updated eligibility rules to remove restrictions preventing PPP loans from being granted to small business owners who have previously been convicted of a non-fraudulent crime or who are in default or default. payment for federal student loans. These changes are reflected on the updated PPP borrower forms for the first and second draws.
The release of the SBA guidelines and forms came a day after the AICPA asked Congress to extend the PPP application period by at least 60 days due to ongoing process delays and the need for time. to implement the promised loan calculation guidelines.
AICPA experts discuss the latest news on P3s and other small business support programs at a virtual town hall that takes place every two weeks, including March 4 at 3 p.m. ET. The webcasts, which offer CPE credits, are free for AICPA members and $ 39.99 for non-members. Go to AICPA Town Hall Series web page for more information and to register.
The AICPA Paycheck Protection Program Resource Page houses resources and tools produced by the AICPA to help cope with the economic impact of the coronavirus.
Accounting firms can prepare and process PPP applications on the CPA business financing portal, created by AICPA, CPA.com and fintech partner Biz2Credit.
For more information and stories on the coronavirus and how CPAs can handle the challenges of the outbreak, visit JofA‘s coronavirus resource page Where subscribe to our email alerts for the latest PPP news.
– Jeff drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.