From the Alabama Small Business Development Center:
Self-employed individuals who file Form 1040, Schedule C, Profit or Loss From Business, can now calculate their maximum loan amount using gross income instead of net profit, thanks to new rules PPP issued by the U.S. Small Business Administration (SBA). The new calculation is important for the thousands of sole proprietors, the self-employed, and gig workers in the Alabama, as it will lead to larger forgivable PPP loans.
While this is great news for sole proprietors that file schedule C, unfortunately the change is not retroactive. If you have already applied, an opportunity may still exist for you to re-apply under the new rules.
Act fast: Talk to your lender.
If your lender submitted your application to SBA, but it has not yet been approved, the lender can withdraw the application. You can then reapply with the new forms.
If SBA has received and approved your application, but the loan has not yet been disbursed, ask your lender to cancel the loan in SBA’s system. You can then reapply with the new forms.
If the lender has already disbursed the loan, there is a chance that they have not yet filed Form 1502 with SBA. In this case, ask the lender to cancel the loan in SBA’s system. You can return any funds that were sent to you, and then reapply.
Partnerships and LLC’s are NOT included in the revised application process. However, single-member LLC’s and qualified joint ventures (as defined by IRS) are included.
Most self-employed individuals try to minimize the amount of profit they show on the schedule C; while this keeps taxes low, it also minimized the amount of PPP funds they were eligible to receive under the original PPP calculations.
Owner Compensation: The new definition of owner compensation allows applicants to use either net profit or gross income in its calculation of total payroll costs. For Schedule C filers with no employees, owner compensation either gross income (line 7) or net profit (line 31). Schedule C filers with employees can calculate owner compensation as net profit (line 31) or gross income (line 31) minus employee benefit programs (line 14), pension & profit sharing (line 19), and wages less employee credits (line 26). Owner compensation does not include employee payroll costs, which is why you must subtract lines 14, 19, and 26.
Owner compensation + employee payroll costs (from Form 941) = total payroll costs
Updated program guidelines from SBA:
Interim Final Rule: Revisions to Loan Amount Calculation (March 3, 2021)
New PPP first-draw (Form 2483-C) and second-draw (Form 2483-SD-C) borrower application forms for Schedule C filers using gross income. (Your lender may use a different form or online portal.)
Updated PPP borrower first-draw (Form 2483) and second-draw (Form 2483-SD) application forms.
Note: Not all lenders have configured their online application programs to reflect these updated rules. Please check with your lender!