If you are a sole proprietorship, independent contractor or entrepreneur, this is the best time to apply for a loan to protect the Paycheck program.
The Small Business Administration is expected to release an update of the sole proprietorship version of the PPP loan application on Monday, taking into account a rule change that allows businesses without employees to get more money from the PPP than was previously allocated. Businesses with less than 20 employees also now has an exclusive window to apply for funds, until March 9.
The changes are part of a series of revisions requested by the Biden administration to make the $ 284.5 billion forgiving loan program more equitable and accessible to the smallest businesses.
“This is a change in the ocean,” said Sam Sidhu, vice president and chief operating officer of Customers Bank, a regional lender in Wyomissing, Pennsylvania, referring to the revised calculation of the sole proprietorship. He notes that some of his business customers will see quite different loans than they received in the first OBP round, according to the original calculation. One client, a fitness instructor, is now eligible for $ 12,900, versus $ 1,100; another, an Uber driver, qualifies for a loan of up to $ 20,833, compared to $ 3,300.
From Monday, sole proprietorships, independent contractors and self-employed individuals can apply for a PPP loan equivalent to the figure listed on line 7 of their Schedule C tax form – that is, their gross income. Previously, businesses had to state their net income, or rule 31, on the form, which removes taxes and other expenses from the calculation.
As Sidhu notes, there is a big headache for these businesses. But as with all PPP, it’s not all clear. There are many open questions.
Can existing borrowers request more money?
First, it is unclear whether the loan increase will be retroactive for those who have already received a PPP for the first draw. Neil Bradley, the head of the U.S. Chamber of Commerce’s Chamber of Commerce, said in a City Hall discussion on Thursday that this question may be clarified by upcoming guidance that the SBA is expected to provide along with the updated application. Under current rules, Bradley says, you could not go back to get that extra money. But he adds, the SBA can change this rule.
Bradley says at least, even if it’s not retroactive, you’re basically guaranteed to get more money for your second draw than for your first draw. Note that you should still show a 25 percent revenue decline in any quarter in 2020, compared to 2019, or a 25 percent loss for the full year 2020 in 2019.
Does the forgiveness test change for these borrowers?
Under the PPP, businesses must divide 60 percent of their loan proceeds on wage costs, while the remaining 40 percent can be spent on a variety of expenses, including rental, EAT and technology equipment. For sole proprietorships, independent contractors and self-employed people, Bradley points out that it is generally accepted that all their loan proceeds are actually their wage costs. In other words, you currently do not have to split your loan so that 60 percent is spent on the payroll, while the rest is spent on other allowable expenses, because ‘the assumption is that the whole thing will support your income’. he says.
The assumption may not hold, because gross income – that is, before taxes and expenses – is inherently greater than your net income, Bradley suggests. If the purpose of the PPP for Schedule C is to replace the net income you would have received if the pandemic had not occurred, it cannot follow that you suddenly have a higher number than you earned before the pandemic. In the end, Bradley suggests, it can be difficult to justify a blanket treatment of loan yield. But it’s the SBA to judge.
What is really a payroll expense for Scheme C files?
There is also a lack of clarity on what actually counts as a wage expense for this group of business owners. While Bradley notes that it is generally accepted that the loan proceeds of a Schedule C file are considered all payrolls, the question has never been specifically addressed by the SBA.
If these borrowers do not meet the same standard of forgiveness as employers, that is, they can use most of the proceeds of a loan for things that are not strictly considered payroll – then they can spend their first withdrawal loans almost immediately. Sidhu says that this means that the applicants of Schedule C cannot apply for their first and second withdrawal loan at the same time. He notes that many of these borrowers incurred large debts during the pandemic, so it will not be difficult for them to qualify for the proceeds of their first loan, except for the payroll. They can, for example, pay rent at a store or pay unpaid leases, he suggests.
‘If you are a first borrower and you use the funds according to the SBA guidelines – that is, you first spend the first draw money, you can actually get a [second-draw] loan, and you can do it on the same timeline until March 31, “he says. This is really going to make a big impact. “