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New PPP Loan Calculation Guidance


March 11, 2021

This month, the Small Business Administration (SBA) issued a new Interim Final Rule changing the loan calculation formula for specific Payroll Protection Program (PPP) applicants. The sweeping changes apply to self-employed business owners, independent contractors, and sole proprietors, with or without employees.

The new guidance aligns with the Biden Administration’s focus on increasing small businesses’ access to COVID-19 relief programs. Initially outlined in a February 22nd White House Release, the changes include a new calculation formula, modified eligibility criteria, and more. To help clients, prospects, and others, Klatzkin has summarized the key details below.

Why the Change?

The primary reason for the change has to do with how self-employed applicants previously calculated payroll costs. The rules stated that defined payroll costs for those who file an IRS Form 1040, Schedule C, as payroll (if there are employees) plus net profits (earnings from self-employment). The problem is the formula does not consider the fixed and other expenses which must be paid to maintain operations and keep owners employed. As a result, support for employment for sole proprietors means covering both business expenses and net profits. The new guidance changes the calculation methodology for these employers’ payroll costs to include gross income or net earnings from self-employment. The change will allow a borrower to receive a loan based on the larger gross business income amount and provide an amount necessary to keep the owner employed.

PPP1 Loan Calculation Formula

  • Self-Employed With No Employees – To determine the loan maximum, it is necessary to identify either the gross income or net profit for either 2019 or 2020. Should either exceed $100,000, then reduce the value to $100,000. Calculate the average monthly net profit or gross income by dividing the figure by 12. Then multiply the average monthly net profit/gross income by 2.5. It is important to note this amount may not exceed $20,833. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, being refinanced.
  • Self-Employed with Employees – Calculate the 2019 or 2020 owner compensation by adding net profit or gross income (less employee payroll costs), from your schedule C but not more than $100,000.  To that amount add the gross wages and tips paid to employees limited to $100,000 for any one employee.  Then add employer contributions to group health, life, retirement and other benefit plans. Calculate the average monthly net profit/gross income by dividing this amount by 12. Finally, multiply the average monthly net profit/gross margin by 2.5. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, being refinanced.

PPP2 Loan Calculation Formula

  • Self-Employed with No Employees – For applicants with no employees, the loan maximum is determined by multiplying the net profit or gross income for 2019 or 2020 (not to exceed $100,000), divided by 12, and 2.5 for all businesses other than those assigned a NAICS code starting with 72, as they would use 3.5. The special case borrowers’ amount cannot exceed $29,167 and $20,833 for all other borrowers.
  • Self-Employed with Employees – For these applicants the maximum (limited to $2M)  is determined by multiplying the sum of the net profit reported for 2019 or 2020, divided by 12, or line 7 from IRS 1040, Schedule C, minus lines 14, 19, and 26 divided by 12. The average total monthly payment for employee payroll costs incurred or paid by 2.5 or 3.5 for NAICS code starting with 72.

Good Faith Certification

 PPP applicants must make a good faith certification that the uncertainty of current economic conditions makes the loan necessary to meet ongoing obligations. The SBA issued guidance last year, stating that any borrower that receives a loan for less than $2M will automatically be deemed to have made the certification in good faith. However, since the new IFR provides additional flexibility any borrower that uses the gross income to calculate the loan amount for a first draw PPP loan and report more than $150,000 in gross income will not automatically be deemed to have made a good faith certification.

New PPP Forms

Accompanying the new guidance, the SBA issued several new forms that applicants and borrowers should carefully note, including:

  • SBA Form 2483 – The updated first draw loan application.
  • SBA Form 2483-SD – The updated second draw loan application.
  • SBA Form 2483-C – The new first draw PPP loan application for those filing an IRS Form 1040 Schedule C using gross income for the maximum loan calculation.
  • SBA Form 2483-SD-C – The new second draw loan application for those filing an IRS Form 1040 Schedule C using gross income for the loan.

Effective Date

The effective date for the change is March 3, 2021. It is important to note a borrower whose loan has already been approved will not be permitted to increase the loan amount based on these changes. The last day to apply for a PPP loan is March 31, 2021.

Contact Us

The new guidance provides an expanded relief opportunity for self-employed New Jersey and Pennsylvania-area business owners. Given the new guidance’s complexity, it is essential to consult with a qualified advisor to determine the best path forward. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.

©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.

About the Author

Laura is the Partner-in-Charge of Klatzkin’s Newtown office and focuses on providing accounting and tax solutions to companies in the real estate, professional services, and manufacturing industries. She also works with business owners and high net worth individuals optimizing their estate tax planning strategy. While clients look to her for compliance and planning, it’s the...

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