If you are a sole proprietor, independent contractor or self-employed entrepreneur, now is the best time to apply for a Salary Protection Program loan.
On Monday, the Small Business Administration is due to release an update to the single-owner version of the PPP loan application, representing a rule change that allows companies without employees to earn more money from PPP than they previously received. Companies with fewer than 20 employees now also have an exclusive window for requesting funds, until March 9th.
The changes are part of a series of reviews requested by the Biden government to make the $ 284.5 billion forgivable loan program more fair and accessible to smaller companies.
“It’s a radical change,” said Sam Sidhu, vice president and COO of Customers Bank, a regional lender based in Wyomissing, Pennsylvania, in reference to the revised calculation of the sole owner. He notes that some of his business customers will see loan values very different from what they received in the first round of PPP using the original calculation. A customer, a fitness instructor, will now be entitled to $ 12,900, compared to $ 1,100; another, an Uber driver, will qualify for a loan of up to $ 20,833, compared to $ 3,300.
Starting on Monday, individual homeowners, independent contractors and self-employed individuals can apply for a PPP loan equivalent to the amount listed on line 7 of their tax form C – that is, their gross income. Previously, companies needed to list their net revenue, or line 31 on the form, which removes taxes and other expenses from the calculation.
As Sidhu notes, there is a huge advantage to these businesses. But, as with all things PPP, not everything is clear. There are many open questions.
Can existing borrowers request more money?
First, it is not clear whether the loan increase will be retroactive to those who have already received a first draw PPP. In a discussion at City Hall on Thursday, Neil Bradley, director of policies for the U.S. Chamber of Commerce, noted that this issue can be clarified through future guidance that the SBA should offer along with the updated application. Under current rules, Bradley notes, you wouldn’t be able to go back and get that extra money. But he adds that the SBA can change that rule.
At the very least, says Bradley, even if it is not retroactive, you will basically receive more money in the second draw than in the first. Note that you still need to demonstrate a 25% drop in revenue in any quarter in 2020 compared to 2019, or a 25% loss for the full year 2020 in 2019.
Does the forgiveness test change for these borrowers?
According to the PPP, companies are required to distribute 60 percent of the loan proceeds to payroll costs, while the remaining 40 percent can be spent on a range of expenses, including rent, fixed assets and technical equipment. For individual homeowners, independent and self-employed contractors, Bradley points out that it is generally assumed that all loan proceeds are actually their payroll costs. In other words, you currently don’t have to split your loan so that 60 percent is spent on payroll, while the rest is dedicated to other allowed expenses, because “the assumption is that everything will support your income,” he says.
This assumption may not be valid, since gross revenue – that is, before taxes and expenses – is inherently higher than net revenue, suggests Bradley. If the purpose of the PPP for schedule C archivers is to replace the net revenue you would have received if the pandemic had not occurred, then it does not track, then suddenly having a larger number than what you actually earned before the pandemic. In the end, Bradley suggests, it may be difficult to justify comprehensive treatment of loan proceeds. But that is up to the SBA to evaluate.
What is a payroll expense for Schedule C filers, really?
There is also a lack of clarity about what really counts as payroll expense for this group of business owners. Although Bradley notes that the proceeds from a Schedule C filer loan are generally assumed to be payroll only, the issue has never been specifically addressed by the SBA.
If these borrowers do not respect the same pattern of forgiveness as employers – that is, they can use most of a loan’s resources for things that are not strictly considered payroll – they can spend their initial loans almost immediately. This means, says Sidhu, that there is nothing to stop Schedule C filers from applying for their first and second lottery loans at the same time. He notes that many of these borrowers accumulated huge debts during the pandemic, so it would not be difficult for them to find eligible uses for their initial loan proceeds, in addition to the payroll. They could, for example, pay a store’s late rent or unpaid equipment rent, he suggests.
“If you are a borrower in the first draw and use the funds in accordance with the SBA guidelines – that is, you spend money on the first draw first – you can actually apply for a [second-draw] loan, and you can do that on the same schedule between now and March 31st, “he says.” It will really have a huge impact. “