Is Your Business Now Eligible To Claim A Piece Of The Paycheck Protection Program (PPP) Pie?
The Small Business Administration (SBA) continues to work through the ongoing complexities regarding the Paycheck Protection Program (PPP) and, in doing so, recently released a new interim final rule pertaining to revisions to loan amount calculation and eligibility. Perhaps most notably is the fact that the new guidance makes more sole proprietors, single member LLCs, and independent contractors eligible for much-needed financial relief than ever before. This is excellent news after so many small businesses took a major hit from the COVID pandemic.
According to the American Institute of CPAs (AICPA), the United States of America is currently home to 25 million sole proprietors. Of those business entities, as of the end of February, only 2.6 million have applied for a PPP loan. Moreover, the program still has around $125 billion is still available to help small businesses in need of financial assistance. Because the SBA formally expanded program eligibility, the AICPA requested a 60-day extension to May 31.
We will see what happens with regard to the extension. In the meantime, click here to take a look at the SBA’s interim final rule. Otherwise, read on for an overview and consider whether you are now able to claim PPP relief.
Listen to episode 271, “More Than Taxes: Tax Pros Tackle CARES Act, PPP, & ERC This Busy Season,” on unsuitable on Rea Radio, Rea & Associates award-winning weekly podcast.
SBA’s Interim Final Rule Pertain To PPP Calculation & Eligibility
The SBA’s new interim rule regarding PPP impacts several important areas in the program, specifically calculations and eligibility. Here are some of the more noteworthy changes and clarifications.
Payroll Costs
The SBA’s interim final rule adds to the current definition of “payroll costs” for owners of sole proprietors, single member LLCs, and independent contractors. In addition to net profits on Line 31 of Schedule C, the definition of “payroll costs” now includes gross income (Line 7 of Schedule C), not to exceed $100,000. This definition is only applicable after March 3, 2021 (which is the date this guidance was released). Therefore, any loans approved prior to March 3, cannot be revised.
Employees
If your eligible small business has employees, then all employee-related costs must be deducted from Line 7 (gross income) to calculate owner “compensation.” Specifically, this pertains to Lines 14, 19, and 26, on Schedule C. Employee costs removed from the owner’s gross income “compensation” calculation and are then added in separately as part of the overall payroll costs calculation.
Loan Necessity Certification
Until the recent guidance, any entity applying for a PPP loan with more than $150,000 of gross income, regardless of whether it’s a first-draw loan or a second-draw loan, must provide necessity certification. The updated FAQ, which was also issued March 3, states that any second draw loans less than $2 million are now deemed to be necessary. This is because second-draw loans require borrowers to show a 25 percent decrease in quarterly receipts in at least one quarter in 2020, which effectively demonstrates necessity. For more information, review Question No. 46 in the FAQ.
PPP Loan Forgiveness
For borrowers who used gross income as owner compensation, any proprietor expenses (up to $20,833) can be used to apply for PPP loan forgiveness. Any borrower with a NAICS code beginning with “72” can use any proprietor expenses up to $29,167.
Originally established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the PPP was designed to provide economic relief to small businesses throughout the country. Since it was originally enacted in early 2020, the coronavirus pandemic continued to ensue. As a result, the PPP was extended under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act to make PPP loans available through March 31, 2021, introduce certain revisions to PPP requirements, and permit second draw PPP loans. As mentioned above, the AICPA is pushing for a 60-day extension of the March 31, 2021, deadline. The CARES Act & PPP Task Force at Rea & Associates will keep you posted if and when this occurs. In the meantime, if you have any questions about PPP eligibility and calculations, contact us today to speak with a specialist on our team.
By Paul McEwan, CPA, MTax, AIFA (New Philadelphia CPA Firm)
Looking for more insight into PPP and your options for financial relief? Check out these resources:
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