SBA Announces Changes to How PPP Loans Are Calculated for Self Employed

This week, the SBA decided to make important changes in calculating the amount of PPP funds that a self-employed worker, such as a sole proprietor or independent contractor, may receive in PPP funds. For businesses with employees, PPP loans are generally 2.5 times payroll costs. But for one-person firms that don’t have a payroll, lenders used the net profit number from the IRS 1040 Schedule C, which includes deductions. Because of this, some workers saw very low loan amounts in previous rounds of the program.

To fix the issue, the SBA is revising the formula to match what it uses for farmers. This basically means that they will instead calculate loan amounts from gross income instead of net profit. In the same action, the SBA is going to exclusively focus on PPP applications of businesses with less than 20 employees for a period of two weeks. These moves make tremendous sense for the SBA for a number of reasons and also help a large percentage of the American workforce.

First, more self-employed individuals will be able to obtain larger PPP loans. Since most self-employed individuals tend to show as little net income as possible on their tax return, it usually meant that they would not receive a relevant-sized PPP loan. Next, it allows the money to get paid out quicker. As of Wednesday, Feb. 24, 2021, the Biden administration directed the SBA to only accept applications for PPP loans from businesses with fewer than 20 employees. The move is made to address a disparity in PPP fund recipients as 98% of small businesses employ fewer than 20 people but have received only 45% of PPP funding thus far, according to the SBA.

Readers should also take note of the important rule that expenses paid for using PPP funds are still tax-deductible. The professionals at The Center for Financial, Legal, and Tax Planning, Inc. are more than knowledgeable with regards to reducing your tax burden using proceeds from PPP loans. Please contact us at (618) 997-3436 for more information.