Schedule C Tax Filers to Use Gross Income for PPP Loans

The Small Business Administration (SBA) has issued an interim final rule effective March 4, 2021, that would allow business owners who file an IRS Form 1040, Schedule C, to use gross income rather than net earnings from self-employment in determining payroll costs for Paycheck Protection Program (PPP) loans. Previously, PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule C, as payroll costs (if there are employees) plus net profits, which is net earnings from self-employment.  

This change would affect many sole proprietors who have been effectively excluded from the PPP, especially those with very little or negative net profit, many of which are located in underserved communities. Business owners with employees can use either net profit or gross income minus certain employee benefit and wage expenses.  

PPP loans were initially created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to assist small employers in retaining employees on their payrolls in a time of financial stress during the coronavirus (COVID-19) pandemic. If certain conditions are met, PPP loans can be forgiven and treated as a grant. Among the conditions for full forgiveness is a requirement that 60 percent of loan proceeds be used for payroll expenses. These expenses can include not only wages and salaries, but also employer contributions to defined contribution and defined benefit retirement plans. Expenses can also include providing group healthcare coverage, including payment of insurance premiums. 

To mitigate the risk of fraud or abuse, if a borrower that is Schedule C filer elects to use gross income to calculate his or her loan amount on a First Draw PPP Loan and more than $150,000 in gross income was reported on the Schedule C that was used to calculate the loan amount, the borrower will not automatically be deemed to have made the statutorily required certification concerning the necessity of the loan request in good faith. The borrower may be subject to a certification review by the SBA. 

The interim final rule also removes exclusions for small business owners with prior non-fraud felony convictions and those struggling to make student loan payments from participating in the program. Unless extended, the PPP is currently set to expire on March 31, 2021.