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Paycheck Protection Program Loan Changes For Schedule C Filers

On February 22, 2021, President Biden announced that changes were coming to better assist small businesses receive coronavirus relief. The first measure was to require the SBA to only accept loan applications from businesses and not-for-profits with fewer than 20 employees for a 14-day period commencing on February 24 and ending on March 9.

The SBA then released an Interim Final Ruling (IFR) on late Wednesday, March 3  to provide an alternative formula to increase the loan amounts sole-proprietors, independent contractors and self-employed individuals (Schedule C filers) could receive.  This new IFR now allows these Schedule C filers to use gross receipts rather than net profits to calculate owner compensation and therefore their loan amounts. This is very favorable news for these borrowers, though the change is prospective only and loans already approved cannot be amended.

The reason for this change was simple; if a Schedule C filer had no profits, then they were precluded from receiving a loan on their compensation since they did not have any.

Here is how the new formula will work:

Schedule C filer with no employees

Elect to calculate their loan amount using either Net profits (line 31 of form Schedule C) or Gross Receipts (Line 7 on form Schedule C).

Schedule C filer with employees

In order to avoid double dipping, borrowers need to subtract employee compensation from the owner compensation calculation. The employee compensation will be added back into the loan amount calculation as it has always been done.

Elect to calculate their loan amount using either Net Profits (line 31 of form Schedule C) or the sum of the Gross Receipts (line 7) less Employee benefit plans (line 14), Pension an profit sharing plans (line 19) and Wages (less employment credits) (line 26). This will yield the owners compensation, which then must be capped at $100,000 and added to the amount calculated for employees.

One item to keep in mind, the SBA is concerned about fraud, and to mitigate this risk, it introduced a new rule for certain high-earners. If a Schedule C filer earned more than $150,000 in gross income and elects to use gross income to calculate its loan amount, then the borrower does not obtain the presumption of good faith regarding loan necessity and it may be subject to a review by SBA on the certification that current economic conditions made the loan necessary to support its ongoing business operations.

For specific questions on how this may impact you please contact a member of our SBA Financial Assistance Team.

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