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New PPP Loan Formula for Self-Employed
On March 3, 2021, the U.S. Small Business Administration issued new Paycheck Protection Program rules, including revisions to PPP loan amount calculations and eligibility changes in an effort to expand funding among small businesses. The SBA also released an updated set of frequently asked questions.
Summary of the Changes
- Allows self-employed individuals who file an IRS Form 1040, Schedule C, Profit or Loss From Business, to calculate their maximum loan amount using gross income instead of net profit (see details below)
- Removes the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans
- Removes the eligibility restriction that prevents businesses with owners who are delinquent or in default on their Federal student loans from obtaining PPP loans
These changes noted above relate to both First Draw and Second Draw PPP loans.
Loan Amount Calculation Changes
Loan formula changes are for sole proprietors, independent contractors, and self-employed individuals. The calculation changes came about because many Schedule C borrowers may have received very small PPP loans to support their own employment due to having small net profits.
Loan amount calculation changes are related to all loans approved after March 3, 2021, and are not retroactive. A borrower whose PPP loan has already been approved cannot increase their loan amount based on the new methodology.
If you have no employees, your maximum loan amount is based on 2019 or 2020 IRS Form 1040, Schedule C.
- First, use either line 31 net profit amount or line 7 gross income amount (the amount cannot exceed $100,000)
- Divide by 12 to calculate the average monthly net profit or gross income amount
- Multiply by 2.5 to calculate your loan amount
For First Draw PPP loan borrowers, owner compensation can’t exceed $20,833. For Second Draw loan borrowers, owner compensation can’t exceed $20,833 or 29,167 if NAICS code 72.
If you want to use 2020 numbers to calculate payroll costs and have not yet filed a 2020 tax return, fill it out and compute the value.
If a self-employed borrower has employees, the maximum loan amount is based on 2019 or 2020 IRS Form 1040, Schedule C.
- First, use either:
- Line 31 net profit or
- The new option, which is gross receipts adjusted for payroll costs: line 7 gross income, minus your employee payroll costs reported on lines 14 (employee benefits), 19 (pension/profit sharing), and 26 (wages). The amount cannot exceed $100,000
- Divide by 12 to calculate the average monthly amount
- PLUS average monthly payroll costs
- Multiply by 2.5 months
The SBA also released new PPP loan application forms for Schedule C filers using gross income:
- Form 2483-C: First Draw borrower application form
- Form 2483-SD-C: Second Draw borrower application form
The last day to apply for and receive a PPP loan is March 31, 2021.
If you have any questions or comments please feel free to reach out to our team.