SBA Clarifies Need Assessment for Second Draw PPP Loans and New Rules for Schedule C Filers | Bennett Thrasher Skip to main content

On March 3, 2021, the Small Business Administration (SBA) released new FAQs related to the Paycheck Protection Program (PPP) which incorporate the changes made to the program by the Consolidated Appropriations Act. Notably, the SBA updated FAQ 46 to assure businesses that all Second Draw PPP loan borrowers, because they must demonstrate a 25% reduction in gross revenues, will be deemed to have made the required good faith certification concerning the necessity of their loans. The SBA also issued new guidance on the same day, explaining how Schedule C filers may now calculate their PPP loan amount based on gross income instead of net profit.


The updated FAQs include new questions and answers and updates to the existing documentation, and one significant update concerns the loan necessity requirement related to Second Draw loans. When submitting a PPP loan application, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA originally provided a safe harbor in FAQ 46, whereby any borrower was deemed to have made this required certification in good faith if the borrower, together with its affiliates, received a loan of less than $2 million.

All borrowers must also make this same certification for Second Draw loans. The SBA has updated FAQ 46 to confirm that, because Second Draw PPP loan borrowers must demonstrate a 25% reduction in gross revenues, all such borrowers will be deemed to have made the required certification concerning the necessity of the loan in good faith. Further, the loan amounts received by borrowers for First Draw and Second Draw loans will not be aggregated. Therefore, businesses are now assured that the necessity of their Second Draw loans will not be questioned if they otherwise meet the program’s requirements, and that obtaining a Second Draw loan will not by itself cause the SBA to review their First Draw loan with respect to the issue of loan necessity.

The updated FAQs also address how businesses may calculate the number of their employees to determine eligibility for a First Draw or Second Draw PPP loan. Updated FAQ 14 clarifies that borrowers may use their average employment over the period (generally 2019 or 2020) used to calculate their loan amount. Alternatively, they may elect to use the average number of employees per pay period in the twelve calendar months prior to the date of the loan application. Updated FAQ 36 notes that borrowers must include part-time employees when determining their employee headcount for purposes of determining eligibility. By contrast, borrowers should use “full-time equivalent employees” to determine the extent to which the loan forgiveness will be reduced in the event of workforce reductions.

Finally, new FAQ 65 confirms that employers that receive a First Draw or Second Draw PPP loan are eligible for the Employee Retention Credit (ERC), but payroll costs that are qualified wages for the ERC are not eligible for loan forgiveness if the employer elects to claim the credit for those amounts. The IRS released Notice 2021-20 to explain how PPP loan recipients may apply for the ERC and retroactively secure credits for the 2020 tax year.

Schedule C Filers Can Use Gross Income vs. Net Profit

The SBA also issued a new Interim Final Rule on March 3, 2021, to implement the changes to the PPP announced by the Biden administration. The new rules permit independent contractors, sole proprietors and other self-employed persons who file Schedule C as part of their personal tax returns to base the amount of their PPP loans on “gross income” (line 7) instead of “net profit” (line 31). The gross income amount that may be used to calculate the loan is capped at $100,000, which means that the maximum loan that a Schedule C taxpayer may receive remains $20,833 ($100,000 / 12 months * 2.5). Another change is that borrowers now have the flexibility to use either their 2019 or 2020 Schedule C to determine the amount of their First Draw loan if they have not already received a PPP loan, or their Second Draw loan.

Independent contractors and sole proprietors who did not apply for a PPP loan under the original rules because their business reported a net loss or only limited net income should consider applying now. As we anticipated, those who received a PPP loan before March 3, 2021 cannot change their loan application to base their loan amount on gross income. However, if a sole proprietor or independent contractor experienced the requisite 25% drop in revenue for any quarter of 2020 compared to the same quarter in 2019, they may apply for a Second Draw loan using the new rules.

For Schedule C filers that elect to use the new gross income calculation rules, the SBA has posted two new application forms: Form 2483-C, Borrower Application Form for Schedule C Filers Using Gross Income, and Form 2483-SD-C, Second Draw Borrower Application Form for Schedule C Filers Using Gross Income.

Note that if a Schedule C filer uses their gross income amount to apply for their loan, and that amount exceeds $150,000, the loan will not fall under the safe harbor for loan necessity. As a result, the borrower may be required to demonstrate to the SBA that the loan was “necessary to support the ongoing operations of the business.”

The new Interim Final Rule also implements the other changes to the PPP previously announced allowing self-employed persons and employers who are otherwise eligible to receive PPP loans to obtain them even if the borrower or a 20% or more owner is delinquent on a federal student loan or has a non-fraud-related felony conviction.

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We will continue to monitor developments related to the Paycheck Protection Program and communicate any significant changes that will impact our clients. If you have any questions related to the most recent guidance, please contact your Bennett Thrasher tax advisor by calling 770.396.2200.