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Self-Employed Workers Could Receive Larger PPP Loans Under New SBA Rules

  • U.S. Small Business Administration issues new Paycheck Protection Program rules for self-employed business owners, gig workers, and other non-employer entities
  • Applicants can now use gross income rather than net income to calculate their maximum loan, eliminating problems created by business cost deductions
  • Changes also lift eligibility restrictions for some applicants with felony convictions as well as those who are delinquent or in default on federal student loans

Summary by Dirk Langeveld

Self-employed workers, sole proprietors, and other non-employer entities are eligible for larger Paycheck Protection Program loans under updated rules issued Wednesday by the U.S. Small Business Administration. The changes also lift restrictions that previously barred applicants with felony convictions or unpaid student loan debt from accessing the program.

The changes are outlined in a 32-page interim final rule. The updates follow an announcement last week by the Biden administration that it would be taking steps to broaden access to PPP loans, including $1 billion set aside for non-employer businesses in low- and moderate-income communities. The administration also announced a two-week period, scheduled to end March 9, in which applications are limited to businesses with fewer than 20 employees.

The rule changes are effective immediately since PPP is set to expire on March 31 and available funding could be exhausted before that date.

Updated loan calculation

Under the new rules, those using IRS Form 1040, Schedule C can opt to calculate their maximum PPP loan amount based on gross income rather than net income. The maximum loan amount is capped at 2.5 months of an individual’s 2019 or 2020 compensation, up to $20,833 per individual. The rule change only applies to loans approved after the effective date of the rule, not to borrowers whose PPP applications have already been approved.

Since net calculations include business cost deductions, non-employer entities in the initial rounds of PPP often found that they did not qualify for a loan or could only receive a tiny sum – as low as $1 in some cases. The restrictions also disproportionately affected women and minorities, who own 70 percent non-employer firms according to SBA Office of Advocacy of Census data.

Acknowledging that the use of gross income by Schedule C filers could increase the risk of fraud or abuse of PPP, the SBA says filers reporting more than $150,000 in gross income won’t automatically be deemed to have made the statutorily required certification that they requested the loan in good faith in order to support their operations. As a result, the SBA could audit the application to determine whether the filer requires the funding or if they have access to other sources of liquidity.

The exclusion does not apply to those applying for a second draw PPP loan, since these borrowers are already required to demonstrate a decline in gross revenue receipts above 25 percent in order to qualify.

Felonies and student loans

The new rules lifts an eligibility restriction that barred loans to business owners who had been convicted of a felony within the past year, although the program is still inaccessible to incarcerated individuals or those currently facing felony criminal charges. Business owners are also ineligible for PPP if they had been convicted of, or started probation or parole related to, a felony financial crime, namely fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance.

Delinquency or default on federal student loans within the past seven years are also no longer a restricting factor under the new rules. A business owner is still ineligible if they have been delinquent or defaulted on a loan from the SBA or any other federal agency within the past seven years.

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