NEW PPP Loan Formula Increase

NEW PPP Loan Formula Increase for Self Employed, Independent Contractors, Sole Proprietors


Update on the new PPP loan formula increase for self-employed, independent contractors, and sole proprietors. SBA says it is effective now, but the banks are saying a different version of this new PPP loan increase formula.

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Self-employed, gig workers are still waiting for new PPP rules that would mean bigger loans.

The self-employed and gig workers are anxiously waiting for the Small Business Association to update guidelines to its Paycheck Protection Program, which could mean bigger loans for the group.

The Biden administration announced last week changes to how the SBA will calculate forgivable loans for sole proprietors and other small businesses without any employees. The updated formula — which will likely lead to larger loan amounts for non-employer firms, including sole proprietors and independent contractors — will be announced this week.

It’s still unclear when in the week the SBA will update its guidelines, meaning that those who would benefit from the change should still wait to submit their applications for the program.

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

That’s led to frustration for some who want to take advantage of the two-week priority application window for the smallest businesses that went into effect on Feb. 24 and ends the second week of March. Of course, sole proprietors will still be able to apply for PPP loans until the program deadline at the end of the month; they just won’t get priority treatment once the 14-day exclusivity window closes.

For now, lenders are working to help borrowers prepare what they can to be ready for the updated guidelines.

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.


Video Transcript


The SBA says that self-employed, independent contractors, sole proprietors can get a bigger and a higher PPP Loan amount using any formula. But the banks are saying otherwise. That’s what we are going to talk about in this video.

Thank you for watching. We are Freedomtax Accounting. We are an accounting firm where we have been providing quality tax and accounting services now for over 20 years. I apologize for my voice. I have a very sore throat but I really wanted, we really wanted to give an update on what’s happening with the new PPP Loan formula that is available now for self-employed, independent contractors, sole proprietors, basically anyone who files a Schedule C.

We are in a very tough spot and let me explain why. As you know last week, the White House mentioned and informed everyone that they wanted the SBA to change the way the PPP Loan is calculated for anyone who files a Schedule C. Instead of using Line 31, which is your net profit, to calculate your PPP Loan amount, the SBA is ordered to use now Line #1 which is your gross receipts. That means that you are going to get a higher PPP Loan amount and you can use your gross receipts up to $100,000. So the max you can get is $20,833.

But this opens up additional funding for the self-employed, independent contractors, and sole proprietor because instead of basing the PPP Loan amount on your net profit, now it’s gross receipts so you should be able to get a higher PPP Loan amount.

But here’s the issue. The SBA has said that that new formula, it’s starting now in March and supposedly, it started yesterday, March 1st but the banks are saying that they cannot implement the new formula until they get further guidance from the SBA.

Now, last week and yesterday, we called the SBA to ask them how is this going to work. The SBA agents we talked to yesterday told us that the banks should be already doing the calculation using the new formula. But here’s the thing. The banks aren’t doing it.

Yesterday and last week, we called several banks and they told us that they will not change their formula until they get official guidance from the SBA. And as of this morning, and once again, this may change this afternoon, I hope it does, but last night we tried to do several PPP Loan applications with several lenders and they are not accepting the new formula. They are still calculating the PPP Loan amount for the Schedule C based on Line 31.

So, it’s a very tough decision that people who want to apply for PPP they have to make. Why? Because if you want to apply for the PPP at least in our experience, the lenders, they are taking up to 4 weeks to approve your PPP Loan.

And the problem is, if nothing changes, this round of PPP is ending on March 31st. So if you want to apply for PPP 1 or 2, you should be applying this week or at the latest, next week because the lenders are going to take at least, at least that’s what we are seeing up to now is that they are taking long.

So it puts small businesses in a tough decision where do I wait for the bank to implement the new formula and risk not getting my PPP Loan approved on time? Because remember, by March 31st, you have to have an approved PPP Loan. It’s not that you submit your application before March 31st.

So if you’re a sole proprietor, self-employed, independent contractor, right now today, once again, this can change very fast and I really hope that the SBA clarifies this and I really hope that the banks put their systems up-to-date quickly. But if we have seen anything in this 10 months that the PPP has been in existence, the banks are the ones who really delay most of the process with PPP. So I really hope that happens that they are able to implement this quickly.

But right now, it’s hard for at least us to advise independent contractors that are calling our office asking for advice, “When should I apply?” And right now, we really don’t know because you either apply now and get a smaller amount but you get something or you wait for the bank to adjust their system, wait for the SBA, and you may – your PPP Loan may be a higher amount but it may not be approved on time. So we are in a tough spot.

I, and this is our recommendation, once again, make your own decisions, I would say wait at least a couple of more days, maybe by the end of this week, to see if the SBA finally comes out with guidance and see if the banks adjust their system this week. But if by the end of this week, the banks are still not calculating the PPP Loan based on the new formula, I would suggest to apply. It’s better to get something than nothing.

And if that’s the case, I really hope that the SBA provides a way for people who get PPP, that have already received PPP using the old formula to be able to reapply to get the difference. I think that’s only fair.

But once again, I just wanted to share this information with you because that’s what we are going through. Every day, we are advising independent contractors, small businesses that want PPP and especially people who are self-employed, they are asking us for advice, “What should I do?” and it’s pretty hard because it’s either apply now and get a smaller amount and we don’t know if you’re going to be able to reapply to get the difference or wait for the banks and maybe you’re going to get your PPP application with a higher amount but then it’s not enough time for your application to be approved before March 31st.

And now, I really think that the March 31st date is going to be pushed back but we haven’t heard anything. And especially last Friday, the new stimulus bill that passed the House of Representatives, there’s nothing in that bill that says pushing the PPP Program date back. It does say that they are approving additional funding but it doesn’t say that they are going to change the March 31st end date.

So anyway, we just wanted to be honest. We just wanted to bring you this information because that’s what we are seeing every day here in our office where we are consulting our clients that are looking for advice on what to do. And right now, it’s tough because the SBA says, “Yes, you can apply with the new formula now.” And the banks are saying, “We are waiting for the SBA.”

So anyway, let us wait a couple of days. And I really hope that something happens today or tomorrow. Something has to happen pretty soon about the SBA coming out with guidance. As soon as they do, believe me, we are going to do a video on it and keep you informed the best we can. OK?

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