Sean Bryan Authors Article on New PPP Rules for Sole Proprietors, Contractors, and Self-Employed

Sean Bryan's column—entitled "New Rules for PPP Loans for Sole Proprietors and Persons with Non-Financial Felonies"—addresses the new rule allowing sole proprietors, independent contractors, and self-employed individuals to calculate their loan eligibility using gross income rather than net income, making the loans more substantial.

On March 3, the SBA posted a new Interim Final Rule that (i) provides an alternate means of calculating the maximum PPP loan amount of a sole proprietor by using gross income and (ii) eliminates non-financial felony convictions of a material owner from disqualifying a PPP loan applicant. Both changes are intended to make PPP loans more available to small businesses, particularly those located in underserved communities. 

Prior to this Interim Rule, a sole proprietor was required to determine his or her loan amount based on "net profits" set forth in IRS Form 1040, Schedule C, which were payroll costs plus net earnings from self-employment. This did not take into account the fixed and other business expenses to be covered by a small business owner. Therefore, after the date of this Interim Rule, a borrower may use either net profit or gross income from either the 2019 or 2020 tax return. The calculation is somewhat different depending on whether the business has employees or just the proprietor, the difference being the deduction of payroll costs from gross income. The maximum loan amount possible is $20,833. This change is not retroactive, so an existing borrower may not receive an increase in the loan amount if otherwise permitted under the new method of calculations. 

A note of caution – if an applicant reports more than $150,000 in gross income in the Schedule C used to calculate the loan amount, then that borrower is presumed to have other sources of liquidity and therefore is not automatically deemed to have certified in good faith the necessity of the loan, even though the loan is less than $2,000,000 which otherwise constitutes a safe harbor. Consequently, such loan will be subject to SBA review. And the underlying IRS Form 1040 and Schedule C must be submitted with the PPP loan application. 

This Interim Rule also revised the eligibility of a business with a 20% or more owner who has a prior non-financial felony. A felony involving fraud, bribery, embezzlement, or a false statement on a loan application within the past five years continues to make a business ineligible for a PPP loan, but the one-year look back for any other felony was removed. The Interim Rule does not discuss this change's timing effectiveness, but a business previously ineligible for a PPP loan solely because of a non-financial felony of one of its major owners should now be eligible to apply.

Interim Final Rule: