New Guidance for Schedule C Filers

The Small Business Administration (SBA) has released new guidance on how small business owners who report their income on a Schedule C should calculate the amount of a PPP loan. The regulations were changed to enable small, underserved businesses easier access to PPP funds to keep their businesses operating during the economic recovery from COVID-19.

The new regulations are an outgrowth of the COVID-19 relief legislation enacted in late December 2020, which provided a second round of Paycheck Protection Program (PPP) loans with specific rules to ensure that smaller businesses would have access to the funds. The recent guidance on the regulations applies to small business borrowers who file a Form 1040 and report their business income or losses on a Schedule C.

The calculation is similar to the current Schedule F calculation that was released when the legislation was passed.

Below are some key items contained in the guidance:

  • Borrowers who have a Schedule C that includes payroll costs for employees will have to complete an additional calculation to see how much of the gross income is allowed to be used. This calculation is similar to the Schedule F calculation.
  • Borrowers can use 2019 or 2020 Schedule Cs for their calculations.
  • Schedule C filers are not required to use gross income and can still use net income to calculate PPP loan amounts.
  • Borrowers whose loans were approved before March 3, 2021 cannot request additional funds using the new calculation method. Those who are currently applying for PPP2 can use the new calculation method even if the PPP1 loan was completed using the old method.
  • Schedule C loans that use gross income and have over $150,000 of gross income reported on their Schedule C will not be eligible for the SBA safe harbor for the good faith certification. The borrower may be subject to a review by the SBA of its certification for necessity before the loan is granted. The SBA considers Schedule C borrowers with gross income over $150,000 as having access to other liquidity support for their businesses. Those with gross income over $150,000 need to have detailed documentation of the economic necessity for their loans.
  • The expenses a business can use in calculating the PPP loan amount using the gross income calculation will follow the existing qualifications for loan forgiveness.
  • The SBA has reduced restrictions on loans to borrowers who had previous felonies or are delinquent on student debt. If these circumstances apply to you, contact your Adams Brown advisor to determine your eligibility for a PPP loan.
  • Previous SBA guidance determined that borrowers with multiple Schedule Cs had to combine them to calculate the 25% revenue reduction necessary for a PPP2 loan. No netting guidance has been provided for Schedule Cs and Fs owned by the same taxpayer at this time.

Further guidance and FAQs are expected from the SBA and more information will be shared as it becomes available.

Potential borrowers should act now

Approximately 54% of the total PPP funds available in this new round have already been committed to borrowers who have applied. There are still funds available, but applicants will want to apply soon to ensure funds are available, as application processing is taking longer due to more stringent verification efforts by the SBA.

Only businesses with fewer than 20 employees can apply before March 10. The program is set to expire on March 31.

For more information, contact your tax advisor.

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