The Small Business Administration (SBA) recently implemented changes to the Paycheck Protection Program (PPP) that affect self-employed individuals who applied for the loan. Sole proprietors and independent contractors have the ability to take advantage of full forgiveness of the loan while using the funds however they see fit. Below is an overview of these changes.

From Net Profit to Gross Income

Sole proprietors and independent contractors can now use Gross Income rather than Net Income as the loan amount for the owner’s payroll costs. Sole proprietors and independent contractors who did not initially qualify for a PPP loan due to having shown a net loss (or minimal profit) may now qualify. The gross income reported on Line 7 is still capped at $100,000, meaning that the maximum loan a Schedule C taxpayer may receive stands at $20,833. The entire amount is automatically eligible for forgiveness as owner compensation share.

Owner Compensation Share

The PPP loan calculation was previously based off of net income, and the amount a sole proprietor business owner could take was called “owner compensation replacement.” Schedule C filers could receive a PPP loan based upon 20.833% of the net profit shown on Schedule C of the Form 1040, but not exceeding $100,000. However, since the implementation of the new Interim Final Rule, loan amounts granted after March 3, 2021 are referred to as “owner compensation share”.

Personal Payroll Eligibility

The entire PPP loan can be claimed as personal income replacement for sole proprietors and independent contractors. Keep in mind that to take the full amount of owner compensation share, you will have to use a covered period of 24 weeks. If you are using the PPP loan as personal income replacement, it must be done within this period. You also are ineligible to claim unemployment benefits for the full 24 weeks.

What About Sole Proprietors Who Already Received a PPP Loan?

Sole proprietors and independent contractors who already received a PPP loan prior to the March 3^rd Interim Final Rule are not eligible to amend the loan application to make up for the difference. However, sole proprietors and independent contractors who had a 25% decrease in revenue for any quarter as compared to the same quarter in 2019 are eligible to receive a Second Draw PPP loan.

PPP and Taxes

A PPP loan will not affect your 2020 taxes. With the changes made at the end of 2020, PPP expenses can be forgiven and deducted from your taxes. Further, any forgiveness amounts will bot be considered part of your taxable income.

Necessity Requirement

PPP rules restrict loans made to borrowers where the advancement is not “necessary to maintain the ongoing operations of the business”. In other words, sole proprietors and independent contractors who have significant income are not generally eligible. According to the updated FAQs, “borrowers still must certify in good faith that their PPP loan request is necessary…that current economic uncertainty make this loan request necessary to support the ongoing operations of the Applicant.” Also, “because Second Draw PPP Loan Borrowers must demonstrate that they have had a 25% reduction in gross revenues, all Second Draw PPP Loan Borrowers will be deemed to have made the required certification concerning the necessity of the loan in good faith.”