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IRS Makes Favorable Changes to PPP Loan Calculations for the Self-Employed

Joseph Most, J.D.

3.9.21 | Client Alert

Last week, the Small Business Administration (SBA) released a new Interim Final Rule (IFR) addressing Paycheck Protection Program (PPP) loan amount calculations for self-employed individuals. Under the PPP, potential borrowers who reported self-employment income on Form 1040, Schedule C, were able to request a loan based on both wages paid to employees and owner compensation replacement. The new IFR makes favorable changes to how owner compensation replacement is determined.

The Change

Previously, this amount was calculated based on 2 ½ months of net 2019 (or 2020 for loan requests made after the Consolidated Appropriates Act, 2021) Schedule C income, up to a maximum of $100,000 of net income on an annualized basis. Therefore, loans for owner compensation replacement could be a maximum of $20,833 ($100,000 x 2.5/12). However, the net income requirement meant that borrowers who showed a loss on Schedule C could not obtain a loan for their self-employment income. The new IFR allows for an alternate calculation using gross income1 as the measuring stick. Therefore, applicants can obtain a loan of up to $20,833  if they earned $100,000 or more2 of 2019 (or 2020) gross receipts from their trade or business reported on Schedule C.

Some Limitations

The IFR only applies to loans approved after its date of issuance. As a result, earlier applicants cannot reapply to increase their loan amount. Additionally, if an applicant chooses the gross receipts calculation and also has payroll, it must reduce the gross receipts claimed as owner compensation replacement by the wage expense claimed. Finally, the SBA has set a “loan necessity” safe harbor with a $150,000 threshold. Borrowers who elect to calculate their loan amount using gross income and who earned more than $150,000 of gross receipts in that year will not automatically be deemed to have made their certification of loan necessity in good faith and will have to complete SBA Form 3509 (PPP Loan Necessity Questionnaire).

For more information, please contact your Berdon Advisor.

This alert is for general information purposes only and is not intended, and should not be construed, as legal or tax advice.

1Gross Income is taken from line 7 of Schedule C. Generally, this equals the gross receipts/sales of the business reduced by returns & allowances and cost of goods sold.

2The owner compensation replacement component of the loan amount lowers as gross receipts are below $100,000. The loan amount will be calculated by multiplying Schedule C gross receipts by 2.5 and dividing by 12.