On March 3, 2021, the Small Business Administration (SBA) released changes under the interim final rule related to Paycheck Protection Program (PPP) loan amount calculation and eligibility and issued an updated version of its Frequently Asked Questions (FAQs) to reflect changes made by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enacted on Dec. 27, 2020.
Eligibility Restriction Eliminations
Delinquent or Default on Federal Student Loans: The eligibility restriction that prevents businesses with owners who are delinquent or in default on their federal student loans from obtaining First Draw or Second Draw PPP loans has been removed, and all hold codes, if any, should now be cleared.
Fraud Felony: The eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining First Draw or Second Draw PPP loans has been removed. This is not retroactive.
This means that if borrowers falsified their certification on their First Draw PPP Loan application by certifying that they did not have a non-financial fraud felony when they actually did, and the SBA finds the felony as part of its compliance checks, borrowers will be found ineligible for their First Draw PPP Loan. Furthermore, because they were ineligible for their First Draw PPP Loan, they remain ineligible for a Second Draw PPP Loan even though now the restriction against non-financial fraud felonies is no longer in place.
Updates for Schedule C Filers
Maximum Loan Amount Calculation for Schedule C Filers
Starting March 5, 2021, the SBA will accept new applications for Schedule C filers using a new First Draw application form and a new Section Draw application form.
Schedule C filers who want to take advantage of the new maximum loan amount can only do so by using the new loan application form as opposed to obtaining a loan increase. Therefore, if a Schedule C filer has already applied and wants to use the new calculation to increase their loan amount, the following options are available:
- If an application has been submitted to the platform but has not yet been approved, the lender may withdraw the application from the Paycheck Protection Platform and the applicant may apply for a new loan using the new application form.
- If the application was approved but the loan has not yet been disbursed, the lender may cancel the loan in E-Tran Servicing and the applicant may apply for a new loan using the new application form.
- If the lender disbursed the loan but the lender has not yet filed the related Form 1502, the lender may cancel the loan in E-Tran Servicing and the applicant may repay and apply for a new loan using the new application form.
- If the lender disbursed the loan and filed the related Form 1502, the loan cannot be canceled.
The cancellation process can take up to two days to update on E-Tran before a lender can submit a new application. In order to take advantage of this change, affected borrowers should contact their lenders with enough time to account for this delay.
Partners and partnerships are not included in the above-mentioned Schedule C revisions. However, single-member LLCs that file Schedule C and qualified joint ventures as defined by the Internal Revenue Service (IRS) are included.
A qualified joint venture is defined by the IRS as a joint venture that conducts a trade or business where:
- The only members of the joint venture are a married couple who file a joint return.
- Both spouses materially participate in the trade or business.
- Both spouses elect not to be treated as a partnership.
This only includes businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company). The spouses must share the items of income, gain, loss, deduction, and credit in accordance with each spouse’s interest in the business. Jointly owning property is not sufficient in and of itself to be a qualified joint venture.
Schedule C Filers with Employees
The formula to calculate maximum loan amounts for Schedule C filers with employees has been revised as follows:
Step 1: Compute payroll using either:
a. Net profit (line 31 of IRS Form 1040, Schedule C) [prior formula]; or
b. Gross income (line 7 of IRS Form 1040, Schedule C) minus employee payroll costs (lines 14, 19 and 26 IRS Form 1040, Schedule C).
If the amount is more than $100,000, reduce to $100,000; if less than zero, set to zero.
Next, add eligible employee payroll costs.
Step 2: Calculate the average monthly amount (divide the sum from Step 1 by 12).
Step 3: Multiply the average monthly amount from Step 2 by 2.5.
Step 4: Add the outstanding amount of any Economic Injury Disaster Loans (EIDL) made between Jan. 31, 2020 and April 3, 2020.
Good Faith Certification
The good faith loan necessity certification threshold for Schedule C filers is reported gross income in an amount of more than $150,000.
For further information, please contact any member of Taft’s SBA Task Force.
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