Once again the Small Business Administration (SBA) has released an Interim Final Rule (IFR) with regards to PPP loans. This IFR allows self-employed individuals who file Form 1040 Schedule C to use gross income in calculating Payroll Costs (as a refresher, payroll costs are a major factor in determining PPP loan amounts). Previously, the owner compensation portion of payroll costs had to be calculated using net income. This put self-employed individuals at a significant disadvantage, as their profit margins are often razor thin.

Under the new IFR, applicants without employees can choose to calculate owner compensation based on Schedule C gross income, subject to a $100,000 cap.

Applicants with employees can choose to calculate owner compensation based on:

• Net profit (the original formula) or
• Gross income minus certain expenses (employee benefit programs, pension and profit sharing plans, and wages)

The prior requirement that monthly owner compensation multiplied by 2.5 cannot exceed $20,833 still applies. For businesses with an NAICS code beginning in 72, monthly owner compensation multiplied by 3.5 cannot exceed $29,167.

This change is not retroactive. It only applies to PPP loans that are approved after the effective date of this rule.

To mitigate fraud and abuse, the SBA has added a few provisions to this ruling:

• If a Schedule C filer uses gross income to calculate their loan amount on a First-draw PPP loan, and the borrower reported more than $150,000 in gross income, that borrower may be subject to a review by the SBA.
• Borrowers must provide evidence they are self-employed, in the form of an IRS Form 1040 Schedule C or an IRS Form 1099-MISC from the year used to calculate the loan amount.
• If a Schedule C filer has used gross income to calculate owner compensation, and that compensation is reported as greater than $150,000, they are no longer eligible for the safe harbor that the SBA previously provided. This safe harbor was intended for borrowers that, together with their affiliates, received PPP loans with an original principal amount of less than $2 million.

Finally, this updated IFR updated removes restrictions preventing businesses that are at least 20% owned by individuals in the following categories from applying for PPP loans.

• Individuals with prior non-fraud felony convictions
• Individuals who are delinquent or in default on their federal student loans

We can help

To find out how this rule applies to you, or if you have any other questions, your DDK Tax Advisor and the DDK PPP Team are here to assist you with further guidance.