Self-employed and gig workers could get bigger loans under new PPP rules. 

It just got easier for businesses with less than 20 employees to obtain a PPP loan.

The Government changed how the Small Business Administration’s Paycheck Protection Program calculates forgivable loans for the smallest firms and sole proprietors.

The updated formula — which will likely lead to larger loan amounts for non-employer firms, including sole proprietors and independent contractors — goes into effect the first week of March.

While the SBA has given some information on how the formula for loans will change, it has yet to communicate the specifics of how to calculate loans under the new rules to lenders.

The two-week priority window for the smallest businesses with fewer than 20 employees is now open and runs through March 15th, although PPP loans can still be submitted and processed through the end of March. We are hopeful that the Paycheck Protection Program will be extended beyond that time.

“Loans submitted prior to the official rule changes are subject to the rules in effect at the time of application,” said Carol Wilkerson, a spokesperson for the SBA.

To ensure that sole proprietors receive the benefit of the changes, it’s recommended that lenders not submit their application into the system until the SBA’s written guidance is issued, according to the administration.

Just a few days could make the difference between a loan that keeps sole proprietor afloat and one that doesn’t go very far.

What is known about the formula change so far

For firms with employees, maximum PPP loans are 2.5 times average monthly payroll costs, per the SBA. As a stand-in for payroll costs for solo workers, the SBA used net profit information from tax returns, even though payroll and profit are different measures.

In addition, the net profit line includes deductions, which reduced or eliminated profit numbers for some, yielding small loans or making them ineligible for the program.

The updated formula will instead use gross income as a stand-in for payroll costs, a larger number than net income, meaning many firms will get more money in forgivable loans.

The change is important, as sole proprietorships are the most common business structure in the U.S. The IRS says there are some 41 million self-employed persons in the country and, in 2018, more than 27 million people filed a return with an IRS 1040 Schedule C form for sole proprietors, according the agency. Many of these businesses have been particularly hard hit by the coronavirus pandemic. 

But so far, very little forgivable funding from the SBA has gone to sole proprietorships — according to a recent survey from NASE, nearly two-thirds of its members said they didn’t get any money from the program.

Much of that was due to confusion in the early days of the program around eligibility and forgiveness, which are hopefully clearer today, Hall said. “Many of the reasons that those small business owners did not either apply or get approved for a PPP loan — I think many of those barriers have been removed,” he said.

Loans submitted prior to the official rule changes are subject to the rules in effect at the time of application.

Questions remain

Other small businesses beyond sole proprietors may also want to proceed with caution in applying for a PPP loan, even during the two-week priority window.

Changes that make some student loan borrowers, legal non-residents and those with criminal records eligible for loans also go into effect the first week of March, according to the SBA.

And, there are other questions around the timing of applications for sole proprietors, especially those who already got a loan approved but would get more under the new formula — there isn’t a process for amending a dispersed loan, or holding back an application that’s currently pending.

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