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Millions of self-employed and handymen received good news this week.
The Biden administration on Monday changed the way the Small Business Administration’s Paycheck Protection Program calculates forgivable loans for the smallest businesses and sole proprietorships.
But there is a catch. The updated formula – which is likely to lead to larger loan amounts for non-employer companies, including sole proprietorships and independent contractors – won’t go into effect until the first week of March.
While the SBA has provided some information on how the loan formula will change, it has yet to communicate details of how loans are calculated under the new rules to lenders.
That means business owners who want to get started today in the two-week priority window for the smallest companies with less than 20 employees may want to wait to make sure their applications are subject to the most recent rules.
“Loans submitted before the official rule changes are subject to the rules in effect at the time of the application.” said Carol Wilkerson, a spokesman for the SBA.
To ensure sole proprietorships benefit from the changes, it is recommended that lenders do not submit their application into the system until the SBA’s written guidelines have been issued, the administration said.
Just a few days can make the difference between a loan that keeps a sole proprietorship going and one that doesn’t go far.
What is known about the formula so far is changing
For businesses with employees, the maximum PPP loans are 2.5 times the average monthly wage cost, according to the SBA. As a substitute for wage costs for solo workers, the SBA used net profit information from tax returns, even though payroll and earnings are different measures.
Additionally, the net profit line includes deductions, which reduced or eliminated earnings numbers for some, yielding small loans or making them ineligible for the program.
The updated formula will instead use gross income as a substitute for labor costs, a greater number than net income, meaning that many businesses will get more money in forgivable loans.
“It’s a huge change,” said Keith Hall, president and CEO of the National Self-Employed Association.
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The change is significant as sole proprietorships are the most common business structure in the U.S. The IRS says there are approximately 41 million self-employed people in the country and that in 2018, more than 27 million people filed charges with an IRS 1040 Schedule C form for sole proprietorships. said the agency.
Many of these companies have been hit particularly hard by the coronavirus pandemic. According to data from SBA, about 70% of such businesses without employees are owned by women and people of color, and 95% of the businesses owned by Black and 91% of those owned by Latino are sole proprietors.
But so far, little forgivable funding from the SBA has gone to sole proprietorships – according to a recent survey by NASE, nearly two-thirds of members said they had not received any money from the program.
Much of that was due to confusion in the early days of the program about eligibility and forgiveness, which hopefully is more evident today, Hall said. “Many of the reasons those small business owners have not applied for or approved a PPP loan – I think many of those barriers have been removed,” he said.
Loans submitted prior to the changes to the official rules are subject to the rules in effect at the time of the application.
Carol Wilkerson
SBA spokesperson
Questions remain
Small businesses other than sole proprietorships may also want to exercise caution when applying for a PPP loan, even during the two-week priority window.
Changes that make some student loan borrowers, legal nonresidents and those with criminal records eligible for loans will also take effect in the first week of March, according to the SBA.
And there are other questions about the timing of applications for sole proprietorships, especially those who have already received an approved loan but would receive more under the new formula – there is no process to change a staggered loan or withhold an application currently pending.
“All unknowns at the moment,” said Alex Cohen, CEO of Liberty SBF.
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