Building upon the Biden Administration’s announced changes to the Paycheck Protection Program (PPP) designed to increase access for small businesses, the Small Business Administration (SBA) issued a new Interim Final Rule. The Paycheck Protection Program – Revisions to Loan Amount Calculation and Eligibility, (IFR) provides new loan maximum calculation guidance for the self-employed. A key reason for the change is that under prior rules many of these borrowers could not receive a meaningful loan amount because of the minimal net profits typically reported to the IRS. To address this issue, the IFR now permits self-employed applicants to calculate the maximum loan amount using either net profits or gross income for either 2019 or 2020. To help clients, prospects and others, Hanson & Co has provided a summary of the key details below.
PPP1 – First Draw Loan Maximum
The maximum first draw loan amount available to applicants with self-employment income varies depending on whether the business has employees.
- Self Employed With No Employees – To determine the loan maximum it is necessary to identify either the gross income or net profit for either 2019 or 2020. Should either exceed $100,000, then reduce the value to $100,000. Calculate the average monthly net profit or gross income by dividing the figure by 12. Then multiply the average monthly net profit/gross income by 2.5. It is important to note this amount may not exceed $20,833. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that is being refinanced.
- Self Employed with Employees – Calculate the 2019 or 2020 payroll by adding net profit or gross income, up to $100,000, minus gross income or net profit, include gross wages and tips paid then subtract it from amounts of more than $100,000 paid to employees, and then include employer contributions to group health, life, and other benefit plans. Calculate the average monthly net profit/gross income by dividing this amount by 12. Finally, multiply the average monthly net profit/gross margin by 2.5. It is important to note this amount may not exceed $20,833 per employee. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, that is being refinanced.
PPP2 – Second Draw Loan Maximum
The maximum second draw loan amount available to applicants with self-employment income also varies depending on whether the business has employees.
- Self-Employed with No Employees – For applicants with no employees the loan maximum is determined by multiplying the net profit or gross income for 2019 or 2020 (not to exceed $100,000), divided by 12, and 2.5 for all businesses other than those assigned a NAICS code starting with 72, as they would use 3.5. The amount for the special case borrowers can not exceed $29,167 and $20,833 for all other borrowers.
- Self-Employed with Employees – For these applicants, the maximum loan amount is the lesser of the formula below or $2M. The maximum is determined by multiplying the sum of the net profit reported for 2019 or 2020, divided by 12, or line 7 from IRS 1040, Schedule C, minus lines 14, 19, and 26 divided by 12. The average total monthly payment for employee payroll costs incurred or paid by 2.5 or 3.5 depending on eligibility.
Good Faith Certification
PPP loan applicants are required to make a good faith certification that the uncertainty of current economic conditions makes the loan necessary to meet ongoing obligations. The SBA issued guidance last year which states that any borrower that receives a loan for less than $2M will automatically be deemed to have made the certification in good faith. However, since the new IFR provides additional flexibility any borrower that uses the gross income to calculate the loan amount for a first draw PPP loan and report more than $150,000 in gross income will not automatically be deemed to have made a good faith certification.
PPP Loan Proceeds
The list of qualifying expenses that are eligible for loan forgiveness has been updated to include two new categories, owner compensation replacement and proprietor expenses. If an applicant used net profit to calculate the loan amount, then they can use loan funds to cover owner compensation replacement expenses. The maximum allowable expense is limited to the 2019 or 2020 net profit, whichever was used in the initial loan calculation. If an applicant used the gross income to calculate the loan amount, then they can use loan funds to over proprietor expenses (business expenses plus owner compensation). The maximum amount is limited to the gross income reported for 2019 or 2020, whichever was used in the initial loan calculation.
Other qualifying expenses include employee payroll costs, mortgage interest payments on business obligations on real or personal property, rent and utility payments. Also, interest payments on debt obligations incurred before February 15, 2020, costs related to refinancing an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, and covered operations, supplier, worker protection, and property damage costs.
The recently announced changes will make it easier for Denver small businesses to receive much-needed financial relief through the PPP. However, given the complexity of the changes, it is important to consult with a qualified advisor who can walk you through the process. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.