Authored by Paul Dillon, Pat Balthazor and Michael Wronsky
On March 3, 2021, the Small Business Administration (SBA) released additional Paycheck Protection Program (PPP) loan guidance, including a new interim final rule (IFR), frequently asked questions (FAQ) and updated loan application forms. The guidance accounts for changes made to the PPP by the Consolidated Appropriations Act, 2021 (CAA) and incorporates directives by the Biden administration to increase the maximum loan amounts available to Form 1040 Schedule C filers and to allow applicants and entities owned by individuals who have been convicted of nonfraud-related felonies or are delinquent or have defaulted on their student loans to be eligible for PPP loans.
This tax alert is a preliminary overview of critical points covered by the guidance. Baker Tilly continues to analyze the content in greater detail and will issue additional communications as warranted.
- A Form 1040 Schedule C filer’s maximum loan amount was previously calculated based on its net profit reported on Schedule C line 31 (in essence, deemed owner compensation), plus payroll costs, if the proprietor had employees. The deemed owner compensation component, redefined as “proprietor expenses,” can now be calculated using either line 31 or gross income as reported on Schedule C line 7. Proprietors with employees must reduce the gross income figure by any expenses for employee benefit programs (line 14), pension and profit-sharing plans (line 19) and wages (line 26), to avoid double counting as these amounts constitute payroll costs that factor into the maximum loan amount.
- To mitigate the risk of increased fraud that could arise from use of the gross income methodology, borrowers of loans calculated using gross income of more than $150,000 will not automatically be deemed to have made the loan necessity certification in good faith, and such certification may be subject to SBA review.
- The SBA will review a sample of first-draw loans applied for based on Schedule C gross income, which will require the use of new application Form 2483-C (second-draw borrowers will use Form 2483-SD-C) to determine whether loans computed with gross income amounts of $150,000 or more were applied for in compliance with loan eligibility criteria, including the good-faith certification. The sample size is not specified in the IFR.
- The IFR removes certain restrictions from loan eligibility as directed by the Biden administration in February; specifically, applicants or owners of applicants who have been convicted of nonfraud-related felonies (fraud, bribery, embezzlement or making a false statement in a loan application or application for federal assistance) or are delinquent or have defaulted on their student loans are now eligible for the PPP.
- FAQ No. 46: Revised to provide that as second-draw borrowers must demonstrate a 25% reduction in gross receipts, they be automatically deemed to have made the good-faith certification that their loan is necessary. It additionally clarifies the requirement that all loans greater than $2 million are subject to SBA review for compliance applies only to first-draw loans.
- FAQ Nos. 57 and 58: Defines lobbying activities for purposes of determining whether section 501(c)(6) and destination marketing organizations are eligible for loans, and provide that loan proceeds cannot be used for lobbying activities or expenditures, by referencing section 3 of the Lobbying Disclosure Act of 1995 (2 U.S.C. 1602).
- FAQ Nos. 59 and 60: Clarify that if a first-draw loan borrower files for bankruptcy protection after disbursement of their loan, they are still eligible for forgiveness provided other eligibility requirements are met. However, the borrower will not be eligible for a second-draw loan pursuant to the prohibition against applicants being presently involved in any bankruptcy proceedings.
- FAQ Nos. 61 and 62: Provide that if a second-draw applicant uses or will have used all of its first-draw loan proceeds on eligible expenses, but fails to meet the requirement that 60% of loan proceeds be used on payroll costs, it will still be eligible for a second-draw loan (though its first-draw maximum forgiveness amount will be reduced). Additionally, a first-draw borrower will not be rendered ineligible for a second-draw loan on account of receiving only partial loan forgiveness (i.e., for failure to meet the aforementioned 60% requirement or due to salary or headcount reductions).
- FAQ No. 63: Confirms that SBA size and alternate size standards are not available for determining eligibility for second-draw loans.
- FAQ No. 65: Confirms that borrowers are eligible for the employee retention credit, but cannot request forgiveness for payroll costs that were used to claim the credit.
First- and second-draw loan application forms – Forms 2483 and 2483-SD, respectively, are revised to account for the removal of certain restrictions on borrower eligibility as ordered by the Biden administration.
First- and second-draw loan application forms for Schedule C filers using gross income – Forms 2483-C and 2483-SD-C, respectively, are new for use by applicants using gross income as reported on Schedule C, discussed above.
We encourage you to reach out to your Baker Tilly advisor with questions on how the above may affect your tax situation.