March 8, 2021

The Small Business Administration (SBA) has published an interim final rule in today’s Federal Register regarding eligibility and loan amount calculations for the Paycheck Protection Program (PPP). In particular, the rule removes the prior eligibility restriction that prevented businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans. The rule similarly removes the eligibility restriction that prevented businesses with owners who are delinquent or in default on their federal student loans from obtaining PPP loans.

Separately, the interim final rule also provides self-employed individuals who file Form 1040, Schedule C (“Profit or Loss From Business”) and who have yet to be approved for a PPP first- or second-draw loan in the current phase of the program with the option to calculate the owner compensation share of its payroll costs using gross income (as reported on line 7 of Schedule C) instead of net profit (as reported on line 31 of Schedule C). If a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either net profit or gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Schedule C.  If a Schedule C filer has no employees, the borrower may choose to calculate its loan amount based on either net profit or gross income.

In addition, the interim rule provides that a Schedule C filer that reports more than $150,000 gross income to calculate its first-draw PPP loan will not be able to claim the safe harbor provided for borrowers that, together with their affiliates, received PPP loans of less than $2 million. The SBA states that it is eliminating the “loan necessity safe harbor” for these borrowers because they may be more likely to have other available sources of liquidity to support their business’s operations than Schedule C filers with lower levels of gross income. The SBA adds that it will review a sample of the population of first draw PPP loans made to Schedule C filers using the gross income calculation if the gross income on the Schedule C used to calculate the borrower’s loan amount exceeds the threshold of $150,000. The review will assess whether these borrowers complied with the PPP eligibility criteria, including the good faith loan necessity certification. The SBA states that this will serve as an additional deterrent to fraud, waste, and abuse because higher income borrowers that elect to use gross income rather than net profit to calculate their loan amount will face the prospect of a heightened review, which would include a review of their good faith loan necessity certification.

This interim final rule is effective as of March 4, 2021 and applies to PPP loans approved after March 4, 2021. Comments are due by April 7, 2021 and can be submitted via the federal eRulemaking portal using Docket ID SBA-2021-0010.

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