New Rule Provides For Larger PPP Loans
For Schedule C Self-Employed Businesses

COVID-19 Business Update
Tax Group

The U.S. Small Business Administration (SBA) issued new Paycheck Protection Program (PPP) rules that allow self-employed individuals who file Form 1040, Schedule C, Profit or Loss From Business, to calculate their maximum loan amount using a gross income method, or a method based on net profit. The interim final rule (IFR) titled “Business Loan Program Temporary Changes; Paycheck Protection Program — Revisions to Loan Amount Calculation and Eligibility,” revises the maximum loan calculations for sole proprietors who file Schedule C returns.

The new IFR allows a Schedule C filer who has yet to be approved for a PPP first or second draw loan to elect to calculate the owner compensation share of its payroll costs based on either net profit (as reported on line 31 of Schedule C) or gross income (as reported on line 7 of Schedule C).

If a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either net profit, or gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits) of Schedule C. If a Schedule C filer has no employees, the borrower may simply choose to calculate its loan amount based on either net profit or gross income.

The IFR provides different sets of maximum loan calculation instructions for Schedule C filers with no employees (see pages 10–11 of the PDF) and with employees (see pages 11–13).  The change is not retroactive. The SBA and Treasury have ruled that borrowers whose PPP loans already have been approved cannot increase their loan amount based on the new methodology.  The calculation change is detailed in a 32-page interim final rule.

The change opens the door for larger loans to self-employed individuals, many of whom don’t record much, if any, net profit on their Schedule C.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.