SBA Issues new Paycheck Protection Program Rules (March 2021) | Maillie LLP

SBA Issues new Paycheck Protection Program Rules (March 2021)

The Small Business Administration (SBA) recently issued its latest Interim Final Rule (IFR) to provide new guidance.  Most of the new guidance is to carry out the Biden administration’s directive to make PPP loans more accessible to smaller businesses. 

The new directives change the PPP maximum loan calculations for those that file federal Schedule C as sole proprietors, resulting in higher PPP loan amounts.  Currently, these new rules only apply to PPP loans that have not yet been approved.  With the current PPP application deadline looming at the end of the month, now is the time to act if you are interested in a PPP loan for your sole proprietorship.

First a quick refresher on the PPP 1.0 (2020) vs PPP 2.0 (2021) rules. 

If your business has previously received a PPP 1.0 loan in 2020, then for this round of PPP you would be considered a “Second Draw PPP Borrower”.  As such there are a few new rules, the most significant of which is that to qualify for a Second Draw PPP loan there is a gross receipts reduction test.  A business meets this test and could be eligible to qualify for a Second Draw if there is a 25% or greater reduction in gross receipts for any calendar quarter of 2020 when compared to the same calendar quarter in 2019.  For example, your Q2 2019 gross receipts were $100,000 and the Q2 2020 gross receipts were $70,000.   Since this is a 30% reduction in gross revenue, the business would meet this test to be eligible for a Second Draw PPP loan.

For those businesses that did not receive a PPP loan in 2020, then you would be considered a “First Draw PPP Borrower”.  If you are a First Draw borrower, then the 25% reduction in gross receipts requirement does NOT have to be met.  This is the key difference in the treatment of First Draw vs Second Draw borrowers for PPP 2.0.

Calculating the maximum sole proprietor PPP loan under the new rules

If your sole proprietorship does not have any employees, you can use the following methodology to calculate your maximum loan amount:

1. You can use either your 2019 or 2020 IRS Form Schedule C and can elect to use EITHER your line 31 net profit amount from the business or your line 7 gross income.  If your 2020 return is not yet complete, you can use an estimated 2020 Schedule C.  This is the big change to these rules. 

Under the old rules, sole proprietors could only use the net profit from the business in calculating the maximum allowable PPP loan.  In many cases, this precluded the sole proprietor from getting the maximum PPP loan.  For this calculation, the amount to use is from either line 7 of Schedule C or Line 31 Schedule C, limited to $100,000.  If you do not have gross receipts, you will not be eligible for a PPP loan.

2. Calculate the average monthly net profit amount or gross income amount by dividing the amount from step 1 above by 12.

3. Multiply the average monthly net profit or gross income amount from Step 2 by 2.5 (3.5 if you are a business in the restaurant industry).  This amount cannot exceed $20,833 (which is $100,000/12= $8,333 and then multiplied by 2.5) or $29,167 (if the business is in the restaurant industry).

4. If your business received an Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020 you can refinance that loan into the PPP loan amount requested.  Do not include the amount of any advance paid under an EIDL Covid-19 loan because those advances do not have to be repaid.

If your sole proprietorship does have employees, you can use the following methodology to calculate your maximum loan amount:
1. Compute the 2019 or 2020 annual payroll for the business by adding the following:

a. Either (1) the net profit amount from Line 31 of either the 2019 or 2020 Schedule C or (2) your 2019 or 2020 gross income minus employee payroll costs (which would be from Lines 14, 19 and 26 of Schedule C. 

If this amount is over $100, 000 reduce it to $100,000 or if the amount is less then zero set this amount to zero.

b. 2019 or 2020 gross wages using taxable Medicare wages from each quarter plus any pretax employee contributions for health insurance or other fringe benefits excluded from taxable Medicare wages and subtract any amounts paid to any one individual in excess of $100,000 as prorated and,

c. 2019 or 2020 employer contributions to employee group health, life, disability, vision, and dental insurance, retirement contributions made for employees on Schedule C Line 19, and State Unemployment Insurance Tax paid on behalf of employees.

2. Calculate the average monthly amount by dividing the amount from Step 1 by 12.

3. Multiply the average monthly amount from Step 2 by 2.5 (3.5 if in restaurant industry).

4. If your business received an Economic Injury Disaster Loan between January 31, 2020 and April 3, 2020 you can refinance that loan into the PPP loan amount requested.  Do not include the amount of any advance paid under an EIDL Covid-19 loan because those advances do not have to be repaid.

The CARES Act required that each applicant applying for a PPP loan certify in good faith “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations” of the applicant.  This has not changed for PPP 2.0.

The “good-faith” certification of the need for the PPP funds is a key part of eligibility.  In previous guidance, SBA deemed that any PPP loan for less than $2 million will be deemed to have made the required certification that the loan request was made in good faith.

However, with respect to PPP loans made under these new rules allowing the PPP loan to be based on gross rather than net income AND report MORE than $150,000 in gross income on the Schedule C used to calculate the borrower’s loan amount, the borrower will not automatically be deemed to have made the required certification concerning the necessity of the loan request in good faith.

These changes to the PPP are significant to those businesses that operate as sole-proprietorship and could provide a much-needed boost to those that continue to struggle under the current economic conditions.  Under current law, the PPP application period ends on March 31, 2021 so if you are interested in applying for one for your business, we suggest that you contact your bank as soon as possible.  While there are discussions regarding extending the PPP application period, there is nothing definitive to that end as of this posting.  We will certainly keep you up to date as new developments happen.

If you have any questions concerning anything in this article or anything about the PPP, please reach out to your Maillie representative for assistance.