As the Small Business Administration (SBA) continues to make changes within the requirements and restrictions for PPP Loans, RASI Compliance Director, Brian Smith, ensures small business owners are up to date on the latest amendments. Check out the newest modifications that the SBA has made to the PPP Loans in order to better accommodate small businesses!
2021 SBA CHANGES FOR SMALL BUSINESS ACCOMMODATION:
- There was a 14-day exclusive application window for businesses with less than 20 employees that ended on March 9th. That illustrates the fact that the SBA is trying to help small businesses by providing that period to only allow those businesses to apply for their PPP Loan, allowing the bankers to exclusively concentrate on small businesses.
- More recently, the SBA published guidance to allow Sole Proprietors and Single-Member LLCs to calculate the owner’s compensation for purposes of the PPP Loan based on gross income, rather than net income.
SOLE PROPRIETOR & LLC OWNER’S COMP BASED ON GROSS INCOME VS NET INCOME
Gross income is almost always going to be higher than net income because, for tax purposes, it has fewer expense deductions, whereas net income includes all expense deductions like cost of goods sold, payroll insurance, rent, maintenance, and depreciation interest on loans, etc. This means that when a small business owner applies for a PPP loan after March 3rd, the owner will have an option as to how to calculate their compensation and can therefore receive a larger loan. NOTE: Unfortunately, the guidance was not made to be retroactive, so any owner that applied prior to March 3rd does not receive this benefit.
If you take a small business with no employees that had a net loss on their Schedule C, either for 2019 or 2020 depending on which loan they’re applying for, that business would not be eligible for a PPP Loan because under prior guidance, the loan value is based on net income. So, if that business had a loss, they weren’t able to get a loan; but that same borrower that had a net income loss could have a gross profit of, let’s say for example $50,000, and now can have access to a PPP Loan and receive money.
How much would that small business receive if they had a $50,000 gross profit?
If the business has no employees, the loan amount would be calculated by taking that $50,000 gross income and dividing it by 12 to get the average monthly gross income, and that comes out a little over $4100.00. That amount would then be multiplied by 3.5 for a restaurant business and would be multiplied by 2.5 for other businesses.
$50,000 / 12 = ~$4,167
~$4,167 x 3.5 (for restaurant) = $14,584
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LOAN CALCULATION DIFFERENCE FOR SMALL BUSINESS WITH EMPLOYEES
The loan calculation for a small business with employees is slightly different to account for the payroll cost, but the gross income is still going to be higher than net income, which allows the owner to receive a larger loan.
RESTRICTIONS ON AMOUNT OF GROSS INCOME THAT CAN BE TAKEN INTO ACCOUNT TO CALCULATE THE OWNER’S COMPENSATION FOR A PPP LOAN
The maximum amount of gross income, net income, wages, or earnings; any amount that can be considered for an owner, is $100,000. That translates into a maximum loan amount for a single Member LLC. or a Sole Proprietor of $20,833.