March 8, 2021
Dear Clients, Colleagues and Friends,
On March 3rd, 2021, the U.S. Small Business Administration (SBA) issued an Interim Final Rule (IFR) that provides an alternative method for IRS Form 1040, Schedule C filers to calculate their Paycheck Protection Program (PPP) Loan amounts.
The IFR now allows Schedule C filers to calculate their PPP Loan amount based on either (i) net profit (Schedule C, line 31) or (ii) gross income (Schedule C, line 7). The gross income option presents a unique opportunity for borrowers who were not previously eligible to receive a PPP Loan since they did not have sufficient net profit. Borrowers who have already received their PPP Loan cannot retroactively take advantage of these changes.
If a Schedule C filer has employees, and elects to calculate their PPP Loan amount based on gross income, the borrower must reduce their Schedule C, line 7 gross income by the expenses reported on their Schedule C, lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)).
The SBA has developed new Borrower Application Forms for use by borrowers that are Schedule C filers and elect to calculate their loan amount using gross income. SBA Form 2483-C will be used by such borrowers when applying for First Draw PPP Loans and SBA Form 2483-SD-C will be used by such borrowers when applying for Second Draw PPP Loans. Borrowers who may benefit from this change are encouraged to contact their PPP lenders if their PPP application is currently being processed based on their net profit.
The SBA is aware that the use of gross income by Schedule C filers may, in some cases, increase the risk of fraud or abuse because it will substantially increase the maximum loan amount for relevant applicants, and in some cases an applicant’s gross income may not accurately reflect the extent to which a PPP loan is necessary to support the ongoing operations of the applicant’s business. To mitigate this risk, First Draw PPP Loan recipients who receive a PPP Loan based on their gross income and who report more than $150,000 of gross income (Schedule C, line 7) will not automatically be deemed to have made the required good faith certification regarding the necessity of the loan to support ongoing operations, and the borrower may be subject to a review by the SBA of its certification.
If you have any questions or need further information, please contact your Presti & Naegele professional directly, or dial 212-736-0055 for immediate assistance.
Presti & Naegele