New PPP Rules Explained

03/04/21

By: Amy Lou Blunt, Chief Credit Officer

President Biden announced many modifications to the Paycheck Protection Program last month. On March 3, 2021, the Small Business Administration issued its Interim Final Rule which outlines the actual rules and procedures to implement these changes.

We have received the most calls and inquiries regarding the changes to the maximum loan amount calculation for sole proprietors filing a Schedule C, so we will begin there:

Maximum Loan Amount

This interim final rule allows individuals who file an IRS Form 1040 Schedule C to calculate their maximum loan amount using gross income. To implement the new loan amount calculation for Schedule C filer, the SBA has developed two new forms, SBA Form 2483-C for First Draw PPP application using Gross Income, and SBA Form 2483-SD-C for Second Draw applications using Gross Income.

SBA is implementing this change with respect to PPP loans that were approved after the effective date of this rule. A borrower whose PPP loan has already been approved as of the effective date of this rule cannot increase its PPP loan amount based on the new calculation methodology.

The SBA, in conjunction with Treasury, has determined that a Schedule C filer may elect to calculate the owner compensation share of its payroll costs based on either 1) net profit (Line 31) or 2) gross income (Line 7). The rules are different for those with no employees and those with employees.

If you have no employees, follow these steps:

STEP 1: Using either 2019 or 2020 IRS Form 1040, Schedule C, you may elect to use either Line 31 or Line 7. If this amount is over $100,000, you must reduce it to $100,000. If both lines are zero, you are not eligible for a PPP loan.

STEP 2: Divide the amount from Step1 by 12.

STEP 3: Multiply the amount from Step 2 by 2.5. This amount cannot exceed $20,833. (For NAICS beginning 72- use 3.5, and the amount cannot exceed $29,167.)

STEP 4: Add the outstanding amount of any EIDL made between 1/31/2020 and 4/3/2020 that you seek to refinance. (This does not include EIDL Advances that do not need to be repaid.)This is your maximum loan amount.

You must provide documents that support your calculation. This includes:

• The 2019 or 2020 IRS Form 1040, Schedule C (whichever you use in the calculation, and whether or not it has been filed with the IRS);
• IRS form 1099 MISC detailing non-employee compensation received
• Records that establish you are self-employed.
• Records to establish you were in operation on or before 2/15/2020

If you have employees, follow these steps:

STEP 1: At your election, either the net profit amount (Line 31) of your 2019 or 2020 IRS Form 1040 Schedule C, or your 2019 or 2020 IRS Form 1040 Schedule C gross income (Line 7), minus your employee payroll costs reported on Lines 14, 19 and 26, up to $100,000 on an annualized basis.

PLUS: 2019 or 2020 gross wages and tips paid to your employees whose principal place of residence is in the USA, using IRS Form 941 (line 5c Column 1) from each quarter plus any pre-tax employee contributions for health insurance and fringe benefits not included on the Form 941. Subtract any amounts paid to any individual over $100,000.

PLUS: 2019 or 2020 employer contributions to employee group health, life, disability, vision and dental insurance (Schedule C Line 14), retirement contributions (Line 19) and state and local taxes assessed on employee compensation (reported on state quarterly wage reporting forms)

STEP 2: Take the total from Step 1 and divide by 12.

STEP 3: Multiply Step 2 by 2.5 (for NAICS beginning 72- use 3.5).

STEP 4: Add the outstanding amount of any EIDL made between 1/31/2020 and 4/3/2020 that you seek to refinance. (This does not include EIDL Advances that do not need to be repaid.)

You must provide documents that support your calculation. This includes:

• the 2019 or 2020 IRS Form 1040, Schedule C (whichever you use in the calculation, and whether or not it has been filed with the IRS);
• IRS form 941 and state quarterly wage unemployment insurance tax reporting for each quarter in 2019 or 2020, whichever you used to calculate your loan amount
• A payroll statement from the pay period that covered 2/15/2020 to establish you were in operation on or before 2/15/2020

Another item of note for borrowers:

If a Schedule C filer elects to use gross income to calculate its loan amount on a First Draw PPP Loan, and the borrower reported more than $150,000 in gross income on the Schedule C used to calculate the PPP loan amount, the borrower will not automatically be deemed to have made the required certification concerning the necessity of the loan request in good faith, and may be subject to a review by the SBA of its certification.

The safe harbor clause that SBA previously provided will not apply in this case.

Application Deadline: Extended to May 31, 2021

The last day to apply for and receive a PPP loan is May 31, 2021. While this extension gives applicants extra time to submit applications, we recommend applications be submitted as soon as possible, and not wait until the final day.