THIS IS NOT LEGAL ADVICE. THIS IS COMMENTARY ON REGULATION.
Regulations can be a source of opportunity, as they make a major part in the determination of barriers to entry. An industry or practice is difficult to enter if there is a significant amount of regulative procedures and requirements, versus when restrictions are removed an opportunity may be presented. In this way we are doing our small part to encourage an informed people.
We start from modest beginnings but continue to identify, develop, and research opportunity and strategy for entrepreneurs, to better develop business ideas.
Update to Compensation Calculation
The SBA consults with the Treasury, determines that a Schedule C filer may elect to calculate the owner compensation share from payroll costs based on either net profit or gross income calculation specifications. A Schedule C line 7 contains the Gross income of the Schedule filer and the gross income is on line 31. Schedule C filers with employees, may elect to calculate the owner compensation share of its payroll costs based on net profit or the difference of gross income less line 14, 19 and 26 expenses. Consult your accounting department to see if you qualify.
Other changes include removal of an eligibility restriction which prevents businesses whos owners are delinquent or in default on their Federal student loans from obtaining PPP loans, First and Second draw.
CARES Act section 1114 authorizes SBA to operate PPP regulations without regard to notification requirements.
Sole Proprietor employment was thought to need support that includes covering of business expenses and net profits.
SBA Office of Advocacy of Census data found that firms with no employees are 70 percent owned by women and minorities and 40 percent of those with employees. SBA hope that the changes to the calculation will reduce barriers of PPP loan access for independent contractors, self-employers, and sole proprietors.
The use of gross income by schedule C filers may increase risk of waste, fraud or abuse
gross income may not accurately reflect the extent which a PPP loan is necessary to support ongoing operations of applicants business. To deter against the aforementioned risk exposures; safe harbor that SBA previously provided with an original principal amount of less than $2 million will not apply for when elected gross income on the Schedule C exceeds 150,000, so that the application requires further review.
In certain situations, borrowers may elect between either gross income or net profit from their 2019 or 2020 1040 form Schedule C.
A borrower is allowed to receive a loan amount with calculations based off their gross business income. The change can not be used to increase their PPP loan amount based on the new calculation method. The maximum loan amount is dependent if a borrower has employees. The borrower first may elect to use Schedule C Line 7 or 31 from 2019 or 2020. The 12 month average monthly net profit or gross income is calculated, then multiplied by 2.5. Add outstanding amount of Economic Injury Disaster Loans (EIDL) that were made between January 31, 2020 and April 3, 20201 if borrower is seeking to refinance. The questions and answers were updated to reflect the changes. A copy of the 2019 or 2020 Schedule C which is the basis of your election, must be included with application.
Borrowers with employees need to start with computing payroll from their choice of either 2019 or 2020 and keep to that year through out the as either net profit line 31, or gross income line 7 less the sum of lines 14, 19, 26. Then obtain the year’s sum of gross wages, tips paid to employees whom are residents of the United States. The year’s Employer contributions to employee group health, life, disability, vision and dental insurance, retirement contributions. Calculate the year’s average monthly amount. Multiply by 2.5 and add outstanding amount of any EIDL made between January 31, 2020 and April 3, 20201 that the borrower seeks to refinance.
1correction pending: comment submitted to clarify if between 1st quarter of 2020 or of 2021. Based on other Small Business Administration Covid Relief options or info, most likely 1st Quarter of 2020.
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