By Robert Jackson, CPA
Thursday, March 4, 2021
The Biden administration released a statement last month indicating that there would be changes to the PPP loan program – which included an exclusive 14-day application window for businesses and certain nonprofits with less than 20 employees. Possibly the most anticipated change in that release – was the change in the loan formula for sole proprietors and the self-employed, that is – those that file Schedule C.
But, while the exclusive window opened on February 24th, the SBA waited until last night to officially change the formula for Schedule C filers, who obviously represent a significant portion of the under 20 employee businesses. In the interim final rule (IFR) released last night, Schedule C filers may now elect to use line 7 (gross income) of the Schedule C in the new formula (whereas previously it was limited to line 31, i.e. net profit) for the owner compensation replacement. Note that the owner compensation replacement amount is not exclusively based on Line 7, and also note that the maximum amount for the owner compensation replacement is still limited to $20,833. Furthermore, this new election applies only for those loans that have not yet been received – i.e. new applications.
Thus – the new formula may result in a higher amount for the owner when the net profit was less than $100,000.
The new formula applies for both first and second draw loans. But note that for second draw loans, you must still meet the eligibility requirements, including the 25% receipts reduction rule.
But using the new formula may come at a cost for first draw loans. If use elect to use line 7 and line 7 is more than $150,000, you are not deemed to meet the loan necessity requirement. In other words, you may have to prove it was necessary for you to get a first draw loan if requested by the SBA. This means that you may have to repay the loan and/or incur penalties if the SBA determines you were not entitled to the loan. Note that this $150,000 necessity threshold replaces the previous $2,000,000 affiliate threshold for the Schedule C if you elect to use line 7.
In conjunction with the latest IFR, the SBA also released two new forms for those who elect to use line 7 (gross income) – Form 2483-C for first draw loans and Form 2483-SD-C for second draw loans. The SBA also updated their FAQs, and stated that they are in the process of making more updates to those FAQs as a result of the new IFR released last night.
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