As the March 31^st deadline to obtain a PPP loan approaches, anxiety continues to rise as changes continue to transpire related to the program’s eligibility & forgiveness process. On February 22, 2021, the Biden Administration established a two-week period in which only business with 20 employees or less were able to apply for a PPP loan. This application window, ending March 9^th, allows for smaller business to take greater advantage of the PPP proceeds available.

The new IFR, established on March 3^rd, changed the PPP loan calculation formula for sole proprietors, contractors and self-employed owners allowing them to calculate their loan amount based on the owner’s compensation share of its payroll costs based on either net profit or gross income. These changes both apply to both first draw and second draw loans. Previously, borrowers were only able to utilize the profit reported on their annual tax returns, leaving unprofitable businesses ineligible to apply for a loan. In using gross income, expenses are left out, leaving a huge opportunity for businesses to obtain a loan and allow others to request a larger loan amount. For schedule C filers with employees, the borrower can calculate the owner’s compensation share of its payroll costs based on either net profit or gross income from their 2019 or 2020 Form Schedule-C minus payroll costs reported on line 14 (employee benefits), line 19(pension/profit sharing plans), and line 26 (wages), PLUS the average monthly payroll costs multiplied by 2.5. For those with no employees, the borrower may calculate the loan amount based on net profit or gross income (not exceeding $100,000) from their 2019 or 2020 Schedule C on their Form 1040 divided by 12 and multiplied by 2.5. Limitations on payroll costs may apply. First & second draw owners’ compensation cannot exceed $20,833. To eliminate the potential for fraudulent activity, a Schedule C filer that reports more than $150,000 in gross income to calculate its first-draw loan will not be able to claim the economic necessity safe harbor. The borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith. The borrower may also be subject to review by the SBA of its certification. The SBA may be more likely to have other available options of liquidity to support their business operations more so than the Schedule C filers with lower levels of gross income. Also keep in mind that for limited liability companies with only one member and treated as a disregarded entity for federal tax purposes that file a Schedule C will consider it member as the sole proprietor and owner of the applicant. If the applicant is presented as a qualified joint venture, both spouses will be considered sole proprietors and owners of the applicant.