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By: Jeff Skolnick Uncategorized No Comments
GUIDANCE ON PPP CHANGES AS OF MARCH 3 2021 

On March 3rd, the IRS issued guidance on new rules pertaining to the Paycheck Protection Program (PPP). 

Gross Income The original PPP rules had Schedule C filers (sole proprietors and independent contractors) calculate their maximum loan amount by using the net profit amount shown on Schedule C. (Line 31 of Schedule C).

The new rules allow these individuals to use their Gross Income from Line 7 of Schedule C. Gross Income is calculated by taking total gross receipts and subtracting cost of goods sold. Let’s look at some examples of how this works under the old rules and under the new rules. Borrowers are able to use either 2019 or 2020 figures for PPP loan purposes. 

For these examples assume the Schedule C filer has no employees. Further assume that gross receipts are $130,000, cost of sales are $22,000 and net profit (Line 31) is $36,000. 

Under the old rules – This borrower would take the line 31 amount of $36,000 and divide it by 12. The result is a monthly payroll amount of $3,000. The PPP computation is generally 2.5 times the monthly payroll costs or, in this case, $7,500. I say generally the calculation is 2.5 times the monthly payroll because a “second draw” PPP loan allows businesses with an NAICS code beginning with 72 to receive 3.5 months of their average payroll.

These businesses are generally hotels (other than casinos) and food service businesses. Second draw loans are PPP loans for borrowers that obtained first draw PPP loans in 2020 and have also taken or will take a second PPP loan in 2021. 

Under the new rules – The borrower would base their maximum on gross income (Line 7 of Schedule C) which is calculated by taking the gross receipts of $130,000 and subtracting the $22,000 of cost of goods sold. This figure is $108,000. The maximum amount allowed for PPP is $100,000. $100,000 divided by 12 equals $8,333. $8,333 multiplied by 2.5 equals $20,833. The borrower does have the option to use the old rules if that is their preference.  

For the next two examples assume the Schedule C filer has employees. Gross receipts are $130,000, cost of sales are $22,000 and net profit (Line 31) is $36,000. The $72,000 of non-cost of goods sold expenses ($108,000 gross income less $36,000 net income) includes $48,000 of employee payroll costs. Employee payroll costs include wages, health insurance and retirement benefits paid. 

Under the old rules – There is a two-step method. The first step is to determine the monthly payroll for the Schedule C filer and the second step is to determine the monthly payroll of the employees. The step one computation would take the line 31 amount of $36,000 and divide it by 12. The result is a monthly payroll amount of $3,000 for the Schedule C filer. The step two computation would take the payroll costs of the employees of $48,000 and divide it by 12. The result is a monthly payroll amount of $4,000 for the employees. The PPP computation is 2.5 times the monthly payroll costs ($3,000 plus $4,000) or, in this case, $17,500.  

Under the new rules – There is still a two-step method. The first step is to determine the monthly payroll for the Schedule C filer and the second step is to determine the monthly payroll of the employees. The step one computation would take the gross income (Line 7 of Schedule C) which is calculated by taking the gross receipts of $130,000 and subtracting the $22,000 of cost of goods sold. This figure is $108,000. This filer has employees, therefore the $108,000 is reduced by the $48,000 of payroll costs of the employees yielding a figure of $60,000. $60,000 divided by 12 equals a monthly payroll cost of $5,000 for the Schedule C filer. The step two computation would take the payroll costs of the employees of $48,000 and divide it by 12. The result is a monthly payroll amount of $4,000 for the employees. The PPP computation is 2.5 times the monthly payroll costs ($5,000 plus $4,000) or, in this case, $22,500. The borrower does have the option to use the old rules if that is their preference.  

Although this computation allows Schedule C filers to apply for larger PPP loans, a borrower that has already been approved as of March 3rd cannot increase its PPP loan amount. These rules only apply to borrowers approved after the effective date of this change. One thing to keep in mind. In order to obtain a PPP loan, a borrower has to certify that the loan is required to support ongoing operations. The SBA issued a safe harbor rule that stated borrowers, together with their affiliates, that received PPP loans with an original principal amount of less than $2 million automatically met that requirement. 

For Schedule C filers that use gross income to compute their maximum PPP loan and have gross income of more than $150,000, the safe harbor does not apply. This does not mean that PPP is not required, it just means it’s not automatic. The borrower, if ever audited, would have to prove that PPP funds were necessary to support ongoing operations. 

Eligibility Elimination of restriction that borrowers with a felony arrest or conviction in the last year, other than one related to financial assistance fraud, are eligible for a PPP loan. No business with a 20 percent or more owner that has an arrest or conviction for a felony related to financial assistance fraud within the last five years is eligible for a PPP loan. 

Under the original rules of PPP, businesses with individual 20% or more owners that are currently delinquent or have defaulted on student loans within the last seven years were not eligible for PPP loans. This restriction is eliminated. Join me, Every Monday at 12:30pm (EST) here: https://www.facebook.com/jeffcpaworld/  

If you’d like to book an appointment with me, please click on the link below:  https://calendly.com/jeffskolnickcpa/30min?fbclid=IwAR3GkP_soaRRmP1nq_HgOOO_jksAc2G-nhMvzvudPCG-bsg1NuhATWjbTJs&month=2020-07  

Hang in there and stay safe, Jeff Skolnick, CPA, M.S. Taxation