On February 22, 2021, the Biden administration announced several reforms to the Paycheck Protection Program (PPP) to direct more funding towards the smallest and neediest businesses and promote equitable access to relief. The five major changes announced may make a significant difference if you are a small business owner working on your own or with less than 20 employees, have student debt or are a Green Card holder. Notably, the loan calculation formula applied to independent contractors, sole proprietors and other self-employer persons will be modified to increase the amount of PPP funds they could potentially receive.
The Biden administration will implement the following changes to the PPP:
- Smallest firms given exclusive access: The SBA instituted a 14-day period, which started on Wednesday, February 24, 2021 at 9 AM ET, during which only businesses and nonprofits with fewer than 20 employees can apply for a PPP loan. This 14-day exclusive application period will give lenders and community partners more time to work with the smallest businesses to submit their applications. Note: This also includes individuals who receive 1099s or are otherwise self-employed but see below as we recommend that this group waits for further SBA guidance.
- Less restrictions on formerly incarcerated small business owners: In the original PPP legislation, small business owners with prior felony convictions were prevented from obtaining relief. Now, those with prior felony convictions will be fully eligible to apply, so long as the prior conviction was not related to fraud.
- No more penalizing small business owners with student loans: The restriction preventing small business owners who are delinquent on their federal student loans from applying for a PPP loan will be removed.
- Ensure access for immigrant business owners: The SBA will issue guidance clarifying that non-citizen small business owners who are lawful U.S. residents may apply for a PPP loan using their Individual Taxpayer Identification Number (ITIN) in lieu of a Social Security Number. This opens the opportunity to obtain relief for small business owners currently living in the United States with a Green Card.
- Sole proprietors, independent contractors and self-employed individuals can receive more financial support: The loan calculation formula for these applicants will be revised to allow them to obtain more relief.
Calculating Loan Amounts Based on Gross Income
Under the original rules, individuals without employees calculated their maximum loan amount by starting with the net profit amount as reported on their 2019 Form 1040, Schedule C, line 31. The net profit amount was limited to a maximum of $100,000, and if it was zero or less the individual was not eligible for a PPP loan. The maximum loan amount was calculated by dividing the net profit amount by 12, and then multiplying by 2.5, resulting in a maximum potential loan amount of $20,833.
These rules disqualified unprofitable businesses – a restriction that did not apply to larger businesses organized as corporations, LLCs or partnerships – and limited the size of their loans. Loans for sole proprietors, independent contractors and other self-employed persons will now be based instead on gross income, which will allow unprofitable businesses to qualify for PPP loans and allow many applicants to secure larger loans.
Only small businesses and nonprofits with less than 20 employees can submit their applications from February 24 through March 9, and applications for those with 20 or more employees will be accepted again starting March 10. During this 2-week exclusive application window it is unclear whether the SBA will be holding or approving applications from larger employers that were received and processed by the lender before February 24.
Sole proprietors, independent contractors and other self-employed persons who have not yet applied for a PPP loan should wait until the new rules impacting them are formalized. The SBA will soon issue an Interim Final Rule allowing these individuals to use their gross income to calculate their loans, and according to an official will implement the change by the first week of March. We are concerned that the SBA may not retroactively change the loans for self-employed persons that have already been disbursed, and which were calculated based on the old rules.
There has been no announcement that the March 31, 2021 application deadline will be extended, but the White House remains confident that the program will have significant remaining funds once the 14-day exclusive application period ends.
We will continue to monitor developments with the Paycheck Protection Program and communicate any significant changes that will impact our clients. For further questions or guidance regarding the most recent reforms announced, please contact your Bennett Thrasher tax advisor by calling 770.396.2200.