Author Topic: PSA: New PPP formula for Schedule C businesses means WAY bigger loans  (Read 791 times)

SeattleCPA

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Yesterday the SBA published a new interim final rule that changes the loan amount formula for Schedule C sole proprietors.

The old formula considered the net profit as "owner compensation replacement" or payroll. The new formula instead uses gross income, which is calculated as revenues minus cost of goods sold.

If you did not borrow PPP money because your small business (like many) just didn't have enough bottomline profit? You want to rethink that decision.

One other note: The PPP only goes through the end of this month... so time matters here.

P.S. The actual IFR: https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Amount-Calculation-and-Eligibility.pdf

terran

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #1 on: March 04, 2021, 08:50:55 AM »
Thanks for staying on top of things. Of interest for those of us who've already gotten the loan, I spoke with somewhat at the bank where I got the loan and was told that the guidance they've been given is that loans that have been funded won't be increased, but loans that have not yet been sent to the SBA could be. I got the impression this was guidance from the SBA, but they were kind of ambiguous, so it could have been guidance from higher ups at the bank.

SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #2 on: March 04, 2021, 10:39:36 AM »
@terran that IFR I linked to says, basically, what you describe. If you've already gotten your loan, you're out of luck.

But if you got a first-draw PPP loan, you might of course be able to do a second draw using new formula.

sonofsven

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #3 on: March 08, 2021, 08:37:55 AM »
I'm actually applying for this as a ppp first draw right now.
I've been self employed for 26 years so this is very strange, indeed, free money from the government.
In researching forgiveness I read that the "owners compensation" that equals your net income from schedule C is totally forgiveable, so when using the gross income form the only real places to add more forgiveable space is through business use of home and business mileage for me.
My plan is to park some of the ppp money into my high interest savings account (emergency fund) in case portions of the loan are not forgiveable, so at least it'll earn that whopping half percent interest.
In the meantime I'll do more research regarding spending ppp money on business expenses such as new equipment and tools.
It does feel strange and I admit I feel a tinge of guilt applying for this, being self employed for so long it just feels weird to get help like this.


SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #4 on: March 08, 2021, 04:22:56 PM »
You probably want to ponder the "economic uncertainty" requirement...

Some discussion of this issue here: https://evergreensmallbusiness.com/the-new-sole-proprietor-ppp-formula/

I tell people you want to think not how the optics look at the time you do something like this, but think how the optics will look at the point in future where someone reviews your borrowing


Michael in ABQ

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #5 on: March 08, 2021, 05:36:23 PM »
You probably want to ponder the "economic uncertainty" requirement...

Some discussion of this issue here: https://evergreensmallbusiness.com/the-new-sole-proprietor-ppp-formula/

I tell people you want to think not how the optics look at the time you do something like this, but think how the optics will look at the point in future where someone reviews your borrowing

So my business grew in 2020 (eCommerce, good business to be in during the pandemic). Does the PPP require you to have a drop in income or just face economic uncertainty? My Schedule C on line 7 was about $19k for last year. So that would work out to around a $4k "loan" correct? I never filed for anything previously as it would have only been a pittance and not really worth it.

I can definitely see future politicians being called out for borrowing money meant for struggling businesses when they were doing fine. 

Archipelago

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #6 on: March 08, 2021, 06:04:05 PM »
I'm a sole prop business owner and am posting a 2020 overall profit of around $70k. I've never applied for a PPP loan. What would be the best thing to do in my situation?

Edit: in order to use your 2020 figures do you have to have your 2020 taxes filed?
« Last Edit: March 08, 2021, 06:22:25 PM by Archipelago »

SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #7 on: March 08, 2021, 08:21:26 PM »
Does the PPP require you to have a drop in income or just face economic uncertainty?

Just face economic uncertainty. (Only the second draw loans require 25% percent drop...)

SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #8 on: March 08, 2021, 08:24:57 PM »
I'm a sole prop business owner and am posting a 2020 overall profit of around $70k. I've never applied for a PPP loan. What would be the best thing to do in my situation?

Edit: in order to use your 2020 figures do you have to have your 2020 taxes filed?

Er, best thing to do is get a loan. You're under the $150K gross income level so you don't lose the economic uncertainty safe harbor. Also, I don't think you need your 2020 taxes filed but you'd want to have 2020 tax return in draft form so you can, at the very least, pick higher of 2019 or 2020.

BTW, in @taxtwitter thread, where all the hardcore tax nerds hang out, the word on street is some banks (including JP Morgan Chase) aren't doing the bigger Schedule C PPP loans.

Archipelago

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #9 on: March 09, 2021, 11:32:59 AM »
I'm a sole prop business owner and am posting a 2020 overall profit of around $70k. I've never applied for a PPP loan. What would be the best thing to do in my situation?

Edit: in order to use your 2020 figures do you have to have your 2020 taxes filed?

Er, best thing to do is get a loan. You're under the $150K gross income level so you don't lose the economic uncertainty safe harbor. Also, I don't think you need your 2020 taxes filed but you'd want to have 2020 tax return in draft form so you can, at the very least, pick higher of 2019 or 2020.

BTW, in @taxtwitter thread, where all the hardcore tax nerds hang out, the word on street is some banks (including JP Morgan Chase) aren't doing the bigger Schedule C PPP loans.

My gross income Line 7 on Schedule C came out $165k. The form says to divide this number by 12, and enter $8333.33 if it exceeds that amount. Does this mean that I am eligible for a loan maximum of $20,833? I do not have any employees.

Thanks!

Smokystache

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #10 on: March 09, 2021, 02:48:47 PM »
@SeattleCPA  - So I think I'm getting messed up. Let's take this situation: Sole proprietor. Less than $150k on Line 7 of Schedule C.

In addition to all the required paperwork and documents, one needs to indicate that they the "current economic uncertainty makes this loan request necessary..."

1) I read your links to other discussions about the definition of "economic uncertainty". Does the SafeHarbor rule still apply to a 1st PPP loan?

2) Are the rules for being approved for the loan the same as the rules for the loan being forgiven (assuming the money is used appropriately?)

I may not even be asking the right questions. Thanks for the update on this.

Peaksandvalleys

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #11 on: March 09, 2021, 05:02:40 PM »
You probably want to ponder the "economic uncertainty" requirement...

Some discussion of this issue here: https://evergreensmallbusiness.com/the-new-sole-proprietor-ppp-formula/

I tell people you want to think not how the optics look at the time you do something like this, but think how the optics will look at the point in future where someone reviews your borrowing

So my business grew in 2020 (eCommerce, good business to be in during the pandemic). Does the PPP require you to have a drop in income or just face economic uncertainty? My Schedule C on line 7 was about $19k for last year. So that would work out to around a $4k "loan" correct? I never filed for anything previously as it would have only been a pittance and not really worth it.

I can definitely see future politicians being called out for borrowing money meant for struggling businesses when they were doing fine.


Why does this program exist without better limitations to prevent free money given away to those doing just fine on the back of the rest of tax payers?
The lack of fiscal responsibility these days is atrocious.

Michael in ABQ

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #12 on: March 09, 2021, 06:50:37 PM »
You probably want to ponder the "economic uncertainty" requirement...

Some discussion of this issue here: https://evergreensmallbusiness.com/the-new-sole-proprietor-ppp-formula/

I tell people you want to think not how the optics look at the time you do something like this, but think how the optics will look at the point in future where someone reviews your borrowing

So my business grew in 2020 (eCommerce, good business to be in during the pandemic). Does the PPP require you to have a drop in income or just face economic uncertainty? My Schedule C on line 7 was about $19k for last year. So that would work out to around a $4k "loan" correct? I never filed for anything previously as it would have only been a pittance and not really worth it.

I can definitely see future politicians being called out for borrowing money meant for struggling businesses when they were doing fine.


Why does this program exist without better limitations to prevent free money given away to those doing just fine on the back of the rest of tax payers?
The lack of fiscal responsibility these days is atrocious.

I don't plan on actually applying for this loan. I'm not facing "economic uncertainty" so ethically I wouldn't feel right taking money that was mean for struggling businesses. Some controls are in place, but they're focused on the business doing fine that's applying for a couple million. No so much the small business asking for $10k.

Congress and the SBA designed this program and put certain rules in place. Their decision to forgo many of the normal financial controls in the interest of getting money to those needing it can be debated. Same with the stimulus money and unemployment programs. In the end I'm sure we'll find hundreds of billions of fraud, waste, and abuse across the trillions of dollars the government has shoveled out in the last year or so. Was that fraud, waste, and abuse worth it to get money out faster and more broadly? I'm sure economists will spend many years on that.

SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #13 on: March 10, 2021, 05:51:34 AM »
I'm a sole prop business owner and am posting a 2020 overall profit of around $70k. I've never applied for a PPP loan. What would be the best thing to do in my situation?

Edit: in order to use your 2020 figures do you have to have your 2020 taxes filed?

Er, best thing to do is get a loan. You're under the $150K gross income level so you don't lose the economic uncertainty safe harbor. Also, I don't think you need your 2020 taxes filed but you'd want to have 2020 tax return in draft form so you can, at the very least, pick higher of 2019 or 2020.

BTW, in @taxtwitter thread, where all the hardcore tax nerds hang out, the word on street is some banks (including JP Morgan Chase) aren't doing the bigger Schedule C PPP loans.

My gross income Line 7 on Schedule C came out $165k. The form says to divide this number by 12, and enter $8333.33 if it exceeds that amount. Does this mean that I am eligible for a loan maximum of $20,833? I do not have any employees.

Thanks!

The max does equal $20,833 in your situation. BTW, you probably want to work through the (very simple) PPP application form. It'll really make the mechanics clear.

https://www.sba.gov/sites/default/files/2021-03/Borrower%20Application%202483-SD-C-508.pdf


SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #14 on: March 10, 2021, 06:02:00 AM »
Does the SafeHarbor rule still apply to a 1st PPP loan?

Not really, in effect, now the safe harbor is $150K of less of gross income.

Here's the language from the IFR (which is "the" rule):

Schedule C, borrowers that elect to use gross income to calculate their maximum loan amount for a First Draw PPP Loan and that report more than $150,000 in gross income on the Schedule C that was used to calculate the borrower’s loan amount will not automatically be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA may review their certification that ‘‘Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’’

2) Are the rules for being approved for the loan the same as the rules for the loan being forgiven (assuming the money is used appropriately?)

Yes.
« Last Edit: March 10, 2021, 06:29:16 AM by SeattleCPA »

SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #15 on: March 10, 2021, 06:11:17 AM »
Why does this program exist without better limitations to prevent free money given away to those doing just fine on the back of the rest of tax payers?
The lack of fiscal responsibility these days is atrocious.

It's been a free-for-all. Happy to stipulate that. And, to be fair, lots of groups have received absurd hand-outs from the federal government... hand-outs we'll have to pay back.

Example: People who received more money in the form of unemployment benefits than they would have earned working.

Two things to keep in mind about the PPP program, though. First, to become free money, borrowers spend the money on stuff the Congress specified. Mostly payroll.

Example: Any time you hear about some borrower getting some big $2M loan or whatever, remember they will have used all that money to keep folks on the payroll.

Second thing to remember. The federal, state and local public health policies along with sloppy journalism probably killed off a third of small businesses. The tracktherecovery.org website reports on small business revenue declines and closures. And it's been absolutely brutal. Millions of small businesses were beat up and shut down... often on the basis of poorly-thought-out reactive policies.
« Last Edit: March 10, 2021, 06:14:00 AM by SeattleCPA »

SeattleCPA

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Re: PSA: New PPP formula for Schedule C businesses means WAY bigger loans
« Reply #16 on: March 10, 2021, 06:27:57 AM »
I don't plan on actually applying for this loan. I'm not facing "economic uncertainty" so ethically I wouldn't feel right taking money that was mean for struggling businesses.

I think that's the right thing to do. And then we should keep in mind that much of policy makers' thinking and borrower decisions were getting made back when people worried this was all a LOT worse that it turned out to be. At the start of this, widely read papers and median reports were talking about a 3% to 4% fatality rate. I think that wildly irresponsible piece, Hammer and Dance, by Tomas Pueyo, talked about 8 million to 10 million people dying in US.

Against that backdrop, people wondered not just whether they would survive but whether their small businesses would.

The more than half a million neighbors, family members and friends we've lost represent a terrible tragedy. But in the beginning, many worried we were looking at something 20X worse than what occurred.

Some controls are in place, but they're focused on the business doing fine that's applying for a couple million. No so much the small business asking for $10k.

Congress and the SBA designed this program and put certain rules in place. Their decision to forgo many of the normal financial controls in the interest of getting money to those needing it can be debated. Same with the stimulus money and unemployment programs. In the end I'm sure we'll find hundreds of billions of fraud, waste, and abuse across the trillions of dollars the government has shoveled out in the last year or so. Was that fraud, waste, and abuse worth it to get money out faster and more broadly? I'm sure economists will spend many years on that.

I think we'll find most of this money was really wasted. For what that's worth.

I also think we're going to be surprised by how large the collateral damage was here.

Final thought, which is super tangential but relevant to this subforum... I think the entrepreneurial response to all of the above is to focus on ramping up your small business. Things are getting better. Clearly, something, probably herd immunity though scientists mostly don't want to say that publicly, has massive slowed infections. The vaccines count as medical miracles and will quickly push fatalities way down...

Business owners who get going now will have a huge head start.