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Enormous PPP changes for self-employed; some left behind

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The Small Business Administration and U.S. Treasury have made another major change to the government’s stimulus plan for small businesses: the PPP changes for self-employed will allow a much bigger forgivable loan.

In a clarification to PPP, called an “Interim Final Rule,” Treasury changed the way available loans can be calculated for any business that uses Schedule C of IRS form 1040. Businesses that are sole proprietors, self-employed or even gig workers, are now allowed to determine their loan amount based on gross income, rather than net income.

Part of the PPP changes for self-employed is a punishment for any business owner that was diligent enough to submit an application when this second round of PPP began in early January.

PPP changes for self-employed – simply understood

Reading the rules and trying to understand government legalese can be tiresome, so here’s the best way to understand how Treasury has changed the rule:

You’re a self-employed business owner that does $100,000 in revenue each year. When you file your taxes, you deduct all the expenses it took to run your business, which in this fictional case is $70,000. On line 31 of Schedule C, you (or your accountant) then calculate that your “net income” was $30,000.

In the prior version of the PPP application, you used that $30,000 net income as the basis for determining your loan amount. Specifically, you divided $30,000 by 12 months ($2,500), and then multiplied it by 2.5 ($6,250). And that was the amount of your loan under the former rules.

Now, self-employed businesses are allowed to use the “gross income” as the basis for calculation. In the example above, that would mean $100,000 divided by 12 ($8,333) multiplied by 2.5 ($20,833).

The difference in the amount of forgivable loan opportunity, quite obviously, is massive – an increase of $14,500 in this example.

Why the changes?

The Biden Administration has made it clear they want to make more money available for minority and women-owned businesses. “Businesses that file Schedule C have higher concentrations of ownership by members of underserved groups,” wrote the SBA in its Interim Final Rule. “An analysis by the SBA Office of Advocacy of Census data found that firms with no employees are 70 percent owned by women and minorities, compared to 40 percent for businesses with employees. SBA has determined that changing the calculation for sole proprietors, independent contractors, and self-employed individuals will reduce barriers to accessing the PPP and expand funding among the smallest businesses.”

Why is this controversial?

On Thursday morning, when news of the IFR was announced in the media, an immediate backlash happened, aimed directly at the SBA, the Biden Administration, and anyone else standing in between.

Part of the PPP changes for self-employed is a punishment for any business owner that was diligent enough to submit an application when this second round of PPP began in early January.

As the SBA’s new rules state: “SBA is implementing this change with respect to PPP loans that are approved after the effective date of this rule. A borrower whose PPP loan has already been approved as of the effective date of this rule cannot increase its PPP loan amount based on the new calculation methodology.”

You read that right, and it’s easy to understand the frustration. Any sole proprietor who has already submitted an application based on the old “net income” loan baseline is not allowed to re-apply to get the same funding as those who have procrastinated or, beforehand, were not eligible.

There are a few reasons this is understandable:

  1. If SBA opened the process to businesses that have already been approved, you create an administrative nightmare. The SBA is having a hard enough time dealing with all the problems created with its new software that has rejected otherwise appropriate loans.
  2. As the SBA has said, a lot of people were turned away because many small businesses don’t show a profit. There are ways to claim expenses that will show zero net income, and those businesses haven’t been able to get a penny when they actually need it.
  3. By making this change, and not allowing re-applications, the SBA likely feels good businesses with accountants and solid books don’t need the help as much as the businesses that have been unable to apply in the previous two months. The spirit of the Biden Administration changes to this program have been to get money into the hands of business owners that haven’t been able to get it, and this might help.

These are the basics of the PPP changes for self-employed, but we encourage you to do more reading on the topic to understand qualifications, forgiveness and maximum amounts of loans. These are the most current stories we’ve found today.

Sole proprietors, gig workers get a lifeline – kind of

Can use gross, not net, income

Too bad if you already got a smaller loan

Anger mounts over changes

Read the official new rules here

 

Jonathan McElvy is the CEO of McElvy Partners. His company includes the Greensheet, The Leader, Fort Bend Star, Charlotte Media Group, Coastal Bend Publishing and Texas Printers. He has managed and owned small businesses for 20 years. If your business would like to talk more about your individual needs, click HERE for contact information. You can follow him on Twitter @mcelvy.

 

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