Big changes yet again in the world of the Paycheck Protection Program (PPP), where it sometimes seems the only constant is change.

The White House released a Fact Sheet early yesterday indicating immediate changes to the program intended to shift focus to small businesses with few or no employees, and increase program access to those who may otherwise have been shut out.

The five main changes, as summarized in the CPA Loan Portal-AICPA slide above (from this morning’s webinar), are in two different areas — “Focusing On Small Businesses” and “Increasing Program Access”, and are as follows:

1. Starting Wednesday, a temporary pause in applications for 20+ employee businesses.
2. New eligibility calculation rules for Schedule C self-employed (see below).
3. Borrowers with non-fraud convictions will no longer be prevented from applying.
4. Student loan delinquency will no longer prevent borrowers from applying.
5. Clarify that ITIN applications for non-citizens will be accepted.

The biggest take-away for our client base is #2 above — this particular section of the White House statement:

Help sole proprietors, independent contractors, and self-employed individuals receive more financial support.
These types of businesses, which include home repair contractors, beauticians, and small independent retailers, make up a significant majority of all businesses. Of these businesses, those without employees are 70 percent owned by women and people of color. Yet many are structurally excluded from the PPP or were approved for as little as $1 because of how PPP loans are calculated. To address this problem, the Biden-Harris administration will revise the loan calculation formula for these applicants so that it offers more relief, and establish a $1 billion set aside for businesses in this category without employees located in low- and moderate-income (LMI) areas.

The SBA followed up with their own release shortly afterwards, stating, “The 14-day exclusivity period will start on Wednesday, February 24, 2021 at 9 am, while the other four changes will be implemented by the first week of March. The SBA is working on the program changes and will communicate details throughout this week.”

Therefore, self-employed taxpayers should wait until the new rules are released next week to apply for PPP funds.

What does this mean for applicants and their advisors?

PPP loans are based on wages to employees, which are subject to “payroll tax” (or “Social Security & Medicare taxes”). Whereas for certain types of one-person companies that don’t have payroll, the amount is calculated based on the net profit from IRS 1040 Schedule C — the amount on which “self-employment tax” is paid (also known as “Social Security & Medicare taxes”).

As CNBC reports, because of this method of defining “payroll” for the self-employed, some applicants saw very low loan amounts in previous rounds of the program, because they make very little in profit.

To “fix” the issue, the SBA is revising the formula to match what it uses for farmers. This basically means that they will calculate loan amounts from gross income instead of net profit.

This means that millions of small business owners who posted a loss in 2019 or 2020 will still be able to apply for PPP funds, based on their revenues before deductions are taken.

This sounds wonderful — and to some extent is — but it’s inherently unfair to partnership owners, who also have their PPP loans based on self-employment income. It’s also unfair to the millions of Schedule C filers who already applied for both rounds of the PPP without the benefit of this changed rule.

In a Forbes article from yesterday afternoon, Brian Thompson pointed out, “even more important is the question of whether this formula will be retroactive for those sole proprietors who have already applied. We don’t know yet whether these businesses will be allowed to gross up based on the new formula.”

As for small business advisors, it puts us back in a sprint again, during an already-grueling tax season. This morning, we developed our plan internally for next steps, which is to identify:

1) Clients who file Schedule C;
2) Who have not filed for PPP;
3) Because they have a loss or very low income on Line 31 of their 2019 Schedule C.

Then we’ll reach out to each one of them to explain that they may in fact be eligible for PPP after all, and to offer to prepare their application through our CPA Loan Portal, as we’ve been doing since early January for all our clients who qualify.

Although I am extremely grateful for this opportunity for small business owners, the inequity of the situation is extremely upsetting; we will see if additional changes are made that allow partnerships and prior applicants to use the same rules. But even if those concessions are made, there is an inherent issue with using gross revenues rather than net — which is that other types of single-member companies (S-corps, C-corps, Non-profits and Co-operatives) did not have the same option, and I know quite a few that suffered from lack of PPP funding as a result; even harder-hit were newer companies that did not show a 25% decrease from 2019 to 2020. (It’s hard not to go up from zero.)

I could go on, but I won’t, because it’s tax season and I have to take care of client deliverables in the midst of it all. Who knew that client financial relief would be such a moving target?

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