March 9, 2021

New SBA’s Revised Formula Means Larger PPP Loan Amounts Available to the Smallest of Small Businesses

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Recently, the SBA issued new Paycheck Protection Program (PPP) interim final rule (IFR) entitled, Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to Loan Amount Calculation and Eligibility.¹ The IFR revised the PPP funding calculation such that the smallest of small businesses may qualify for larger loans. More specifically, even those sole proprietors who may not include much, or any, net profit on their IRS Form 1040, Schedule C, Profit of Loss From Business, may now qualify for larger loans. Significantly, though, it should be remembered that this revision is not retroactive; thus, borrowers who have already been approved for PPP loans may not use the new calculation to increase their approved loan amount.

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As we’ve previously reported, before this development, the maximum First Draw PPP loan available for sole proprietors was 2.5 times the average monthly net profit—and net profit was determined based on the prior year’s tax return.² Since the calculation of net profit factors in tax deductions (such as deductions for depreciation) before arriving at the net profit, a Schedule C is often not a true indicator of the business’s actual economic performance; rather, it presents the business’s taxable net income. As a result, many sole proprietorships in desperate need of relief were finding themselves completely ineligible (or only eligible for inadequate amounts) because the deductions greatly reduced or eliminated their average monthly profit.

Fortunately, the new interim final rule accounts for this discrepancy and the application formula now replaces “net profit” with “gross income”—and gross income is not reduced by tax deductions. Now, the smallest of the small businesses—the self-employed, the independent contractors, the sole proprietors—may all be eligible for substantially greater PPP loans.

Consider the following examples:

A. Pre-IFR, a sole proprietor filing a Schedule C calculated the amount of PPP Loan by taking 20.833% of the net profit on Schedule C. So, in the case of a sole proprietor with no employees, $200,000 of gross income, $150,000 of expenses and a $100,000 depreciation expense—that sole proprietor would have a 0 net profit on Schedule C. Thus, the sole proprietor would not be eligible for any PPP Loan amount—and that was the case despite the economic reality that the owner received a cash benefit of having the business that year.

B. Post-IFR, if the sole proprietor files a Schedule C and elects to use gross income in lieu of net profit—although the gross income will be capped at $100,000, the sole proprietor may still qualify to receive $20,833 in PPP Loan proceeds (100,000 X 20.833%).

Again, this is not retroactive—so, only those who haven’t been approved for a PPP Loan (first or second draw) may elect to calculate the owner compensation share of payroll using either net profit or gross income.

If you are a small business owner or have any questions about PPP Loan, please contact our team by calling (410) 497-5947 or requesting a consult online.

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