PPP Update for Schedule C Filers
The SBA announced changes late on March 3rd to the PPP in the attached interim final rule that can impact schedule C filers. These borrowers may now receive, on new loans issued after March 4th, a greater amount than previously allowed. Previously, PPP rules defined payroll cost for individuals who file a schedule C as payroll costs (if employees exist) plus net profits, which is net earnings from self-employment. The SBA determined that changing the calculation for sole proprietors, independent contractors, and self-employed individuals will reduce barriers to accessing the PPP and expand funding among the smallest businesses. Accordingly, the SBA has now established an alternative calculation methodology for payroll costs for sole proprietors and independent contractors that now includes both “income” as well as “net earnings from self-employment”. Because of this, Schedule C filers may now elect to calculate owner compensation based on either (i) net profit, or (ii) gross income (as reported on line 7 of Schedule C). It is important to note, that this new rule applies to only borrowers who apply for a PPP first or second draw loan on or after March 4th. Application of this new rule is not currently applicable to loans previously issued.
Who does this impact?
1. Schedule C filers with losses in 2019/2020 – Previously these individuals had no self-employment income/owner compensation to replace with PPP and therefore, were not eligible to receive a loan. These individuals can now apply using their gross income instead of net income.
2. Schedule C filers with owner compensation (net earnings from self-employment) of less than $100k but higher gross income who have not yet applied for a PPP first and/or second draw loan.
It is also important to note that for these borrowers, the SBA reduced the good faith need certification safe harbor amount from a $2M loan size threshold down to a new $150k gross income threshold for borrowers electing this new method.
As a reminder, the current deadline to apply for a PPP first or second draw loan is March 31, 2021.
If you have any questions regarding your unique situation, please contact your BMSS professional.