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Updated: March 24th, 2021
Sole proprietors, Paycheck Protection Program (PPP) loans just got a whole lot better. The SBA’s recent Interim Final Rule (IFR) states that Schedule C filers (that’s you, sole proprietors) can now use gross income instead of net to calculate PPP loan amounts.
Initially, PPP loans were solely for businesses with employees—which meant sole proprietors weren’t eligible for any funding. Congress made some changes, but these special rules based loan amounts on sole proprietors’ total profits (as shown on their 2019 tax return). For small profit businesses and those already struggling, this meant little-to-no cash.
“The whole idea of the PPP, at least originally, was not so much to put money in a business’s pocket to maintain the business, but to maintain employees,” said Robert Durkin, president of the Scranton Chamber of Commerce.
However, stories emerged about sole proprietors only qualifying for teeny-tiny loans—loans hardly worth the time spent applying.
“I was hoping to get $2,000, maybe $3,000,” said Anne McDonnell, a self-employed hairdresser for 30 years. “When the man from the bank called, he said I have good news and I have bad news. The good news is you got approved. The bad news is, it’s for $500.”
The SBA recently re-righted this wrong to get sole proprietors the financing they need. The March 31 deadline is fast approaching. The SBA had only approved $156 billion (out of $284 allocated) in PPP loans as of the end of February, and this is likely an attempt to move their focus to the next American small business priority: sole proprietors.
Before, these loans were likely not worth the effort for you—however, now you have the potential to earn some fully forgivable, tax-free financing. Below, we’ll cover everything you need to know before applying.
Congress states in the IFR: “The support for employment for sole proprietors includes covering business expenses as well as net profits. This change would affect many sole proprietors who have been effectively excluded from the PPP, especially those with very little or negative net profit, many of which are located in underserved communities.”
Here’s how to calculate your maximum PPP loan amount under the SBA’s new IFR:
And that’s it. That’s the maximum PPP loan amount you qualify for as a Schedule C filer.
The SBA developed a brand-new borrower application form for this new calculation change. First-draw PPP loan borrowers that want to use the new gross income calculations rules will now use SBA Form 2483-C. Depending on your SBA-approved lender, you may need to submit this form and additional documents. When you apply for a PPP loan with Funding Circle, you will not be required to submit Form 2483-C.
You’ll need documentation to support your gross income disclosure, so make sure you find the relevant paperwork to accompany your application. This may include:
The documents you’ll be required to submit will vary by lender, you’ll want to make sure you gather the right documents. You can see Funding Circle’s document requirements here.
Note, however, that these new changes are not retroactive. If you’ve already applied for a PPP loan, your total loan amount based on the gross income calculation can’t be increased.
You’ll also need to certify that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Unfortunately, many sole proprietors have already applied for PPP loan funding, rendering this new change useless to them. With only a couple of days left in this latest PPP financing round, it’s not likely to make a significant impact unless the deadline is extended and Schedule C filers are allowed to resubmit to maximize their loan amounts.
Plus, it’ll take time for banks to implement these changes—leaving a narrow gap for sole proprietors to really take advantage of this opportunity. The American Institute of Certified Public Accountants (AICPA) has called on Congress for a 60-day deadline extension, but there’s been no official response yet.
The SBA’s IFR makes a few other changes to PPP loans.
Next, they changed eligibility rules to allow more business owners to qualify. This change enables entrepreneurs with previous non-fraud felony conditions and those who are delinquent or in default on federal student loan payments to qualify for PPP loan financing.
Hopefully, these changes will help more underserved small business owners get the financing they need to endure this pandemic.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.