SBA Revises PPP Loan Calculation for Schedule C Filers

March 4, 2021

On March 3, 2021, the U.S. Small Business Administration (SBA) released more changes and forms impacting the Paycheck Protection Program (PPP). The release included a new notice, Interim Final Rule – Revisions to Loan Amount Calculation and Eligibility (the IFR), along with a new set of applications (Form 2483-C for First Draw PPP Loans and Form 2483-SD-C for Second Draw PPP Loans). This guidance has been anticipated since the press release announcing the changes was published by the White House on February 22.

The revised calculation

Historically, self-employed individuals were instructed to utilize net profit, found in a tax return on line 31 of Schedule C, to determine “payroll costs” for the owner. If that amount was zero or less, the business would not be eligible for a PPP loan unless it had employees.

The revised formula will now use gross income, found in a tax return on line 7 of Schedule C, for establishing payroll costs for the owner. This change in the calculation will allow certain businesses that were previously ineligible due to zero or negative net profit to now obtain a PPP loan. The change also allows certain businesses to potentially obtain a larger PPP loan, notably if the net profit of the Schedule C filer was less than $100,000.

Why was this change made?

The PPP has been scrutinized for the challenges it has placed on borrowers due to its  constant modifications to regulations. Perhaps more important, though, is the perception that the design of the program did not provide equal opportunity to traditionally underserved groups (based on geography, ethnicity, income levels and gender, to name a few).

In response, the SBA initially released its Guidance on Accessing Capital for Minority, Underserved, Veteran and Women-Owned Business Concerns. Then, the SBA implemented the “exclusivity period”, in which it will only approve PPP loan applications for businesses with fewer than 20 employees for the period between February 24 through March 9. This revision to the formula for calculating loan amounts further supports the initiative to provide funding to those businesses that may lack the resources of large businesses.

Per the IFR, “businesses that file Schedule C have higher concentrations of ownership by members of underserved groups. An analysis by the SBA Office of Advocacy of Census data found that firms with no employees are 70% owned by women and minorities, compared to 40% for businesses with employees.”

Borrower beware

All businesses that apply for a PPP loan must make a certification of need, which states that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” To uphold the intent of the program and mitigate fraud risk, the IFR says that “the borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith, and the borrower may be subject to a review by [the] SBA of its certification” in the event that the Schedule C filer elects to use gross income to calculate its loan amount. Businesses should evaluate this risk and consider appropriate economic and financial information when making this certification.

The bottom line

The PPP is constantly evolving, which means more new changes may be on the way for borrowers. Aprio has established a dedicated PPP team that is continuously monitoring new guidance from the SBA, as well as the U.S. Department of the Treasury, Congress and the IRS, to ensure we have the latest information when advising our clients.

To discuss your eligibility for additional funding or how to interpret these pending changes, contact our team for a consultation.

Disclaimer for services provided relative to SBA programs and the CARES Act

Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.

The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.

Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.

You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.

In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.

Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.

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About the Author

Justin Elanjian

Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.