SBA Loosens Rules on PPP Loan Amount Calculations and Eligibility Requirements

(Parker Tax Publishing March 2021)

The Small Business Administration issued an interim final rule implementing changes related to loans made under the Paycheck Protection Program (PPP) as a result of recent legislation. The interim final rule allows individuals who file an IRS Form 1040, Schedule C, to calculate their maximum loan amount using gross income, removes the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans, and removes the eligibility restriction that prevents businesses with owners who are delinquent or in default on their federal student loans from obtaining PPP loans. SBA-2021-0010.

Background

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) temporarily permitted the Small Business Administration (SBA) to guarantee 100 percent of Section 7(a) loans under a new program titled the ''Paycheck Protection Program,'' (PPP) pursuant to Section 7(a)(36) of the Small Business Act (First Draw PPP Loans). Section 1106 of the CARES Act provided for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act) was enacted. The Economic Aid Act reauthorized lending under the PPP through March 31, 2021. The Economic Aid Act added a new temporary Section 7(a)(37) to the Small Business Act, which authorizes the SBA to guarantee additional PPP loans (Second Draw PPP Loans) to eligible borrowers under generally the same terms and conditions available under Section 7(a)(36) of the Small Business Act through March 31, 2021.

The SBA, in consultation with the Treasury Department, initially published an interim final rule implementing the PPP on April 15, 2020, and subsequently issued additional interim final rules. On January 14, 2021, SBA published interim final rules implementing the Economic Aid Act amendments to the PPP. On February 5, 2021, SBA published an additional interim final rule implementing Economic Aid Act changes related to the forgiveness and review of PPP loans.

SBA-2021-0010

On March 8, the SBA issued a new interim final rule, SBA-2021-0010. This rule revises the consolidated interim final rule implementing updates to the PPP, the interim final rule on second draw PPP loans, and the consolidated interim final rule on loan forgiveness requirements and loan review procedures, to allow individuals who file an IRS Form 1040, Schedule C to calculate their maximum loan amount using gross income.

As a result, a Schedule C filer may elect to calculate the owner compensation share of its payroll coststhat is, the share of its payroll costs that represents compensation of the ownerbased on either (i) net profit or (ii) gross income. Gross income is the amount the borrower reports on line 7 of Schedule C. If a Schedule C filer has no employees, the borrower may elect simply to calculate its loan amount based on either net profit or gross income. If a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either (i) net profit or (ii) gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Form 1040, Schedule C. Expenses reported on lines 14, 19, and 26 of Form 1040, Schedule C, represent employee payroll costs and are subtracted from the owner compensation share of payroll costs if the owner uses gross income to calculate its loan amount in order to avoid double-counting these costs.

Proprietor expenses encompass an owner's business expenses and own compensation but do not include employee payroll costs. This proprietor expenses calculation limits a Schedule C filer that included employee payroll costs in determining the PPP loan amount from taking the full loan amount as owner compensation.

SBA-2021-0010 also revises the consolidated interim final rule implementing updates to the PPP to remove the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans. It also removes the eligibility restriction that prevents businesses with owners who are delinquent or in default on their federal student loans from obtaining PPP loans. The changes apply to both First Draw PPP Loans and Second Draw PPP Loans.

For a discussion of the PPP discharge of indebtedness rules, see Parker Tax ¶72,340.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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