Yesterday, the House of Representatives passed a bill that would extend the Paycheck Protection Program (PPP) application deadline to May 31. This was in response to complaints that people did not have enough time to prepare the loans, particularly since there were some significant rule changes earlier this month. But since the government is in the mood to tweak the PPP rules again, I would like to propose changes listed below which I think will help small businesses and their employees.
Sole proprietors who received their PPP loan should be allowed to amend it to take advantage of the gross income rule. The Biden administration recently announced that sole proprietors who receive Form 1099s and file Schedule C’s on their tax returns would be allowed to use gross income instead of net profit when calculating their PPP loan amount. This was because businesses reporting low profits did not qualify for a large loan so either they didn’t apply for the loan or their bank did not accept their application. A significant percentage of these people were freelance gig workers who likely needed more money to support themselves.
By switching from net profit to gross income, these businesses and gig workers would receive a larger loan. One of my clients qualified for $20,000 as opposed to $2,500 if her net profit was used.
The problem was that some people applied early and received their PPP funding using their net profit before the new rule was implemented. According to CNBC, the SBA stated that if borrowers had a loan that was approved but had not yet been disbursed, lenders could cancel it and the borrower could reapply. Even if a loan had been disbursed, lenders could cancel the loan and borrowers could repay the money and reapply with the new applications, but only if the lender had not yet submitted Form 1502, which includes payment and loan information, to the SBA.
This means that some businesses will be out of luck because they submitted their application too early.
The SBA could simply change their rules to allow businesses that received loans using the net profit rule to get a supplemental loan using their gross income numbers. The process should be quick and simple as opposed to the time-consuming process of canceling a loan, returning the money, and starting the loan process over again.
Small business corporations seeking under $100,000 in loans should be treated like sole proprietors. Corporations that apply for PPP loans are subject to different rules than sole proprietors. In short, a corporation’s PPP loan amount is two and a half months of its total employee compensation (including retirement contributions and health insurance) in 2019 or 2020, whichever is larger. Unlike a Schedule C, net profit or gross income is not included when determining the loan amount.
This can result in different PPP loan amounts solely based on the business entity structure, usually because the owner-shareholders give themselves a low employee salary from the corporation. This could be seen as a way to reward the owners who pay themselves a “reasonable salary” while punishing those who didn’t pay themselves a salary or low-balled it to avoid payroll taxes. Also, owners who pay little to no salaries to themselves to avoid payroll taxes probably won’t lose much since the payroll taxes and PPP money might offset each other.
I’ve found that the problem with the above rationales is that it fails to consider a corporation’s nonowner employees. The owners of a struggling corporation might decide to not apply for the PPP and shut its doors early if they cannot get funding for themselves. Without the funding, there is no point in keeping the business open as it will just incur additional debt which is likely to be guaranteed by the owners. The former employees will have to resort to unemployment benefits and may suffer a financial hardship since the $600/week extended benefits are no longer available.
I also suspect that popular opinion will not support giving corporations PPP money because they are presumed to be wealthy and do not need it. Look, some chronic internet commenters might find this hard to believe, but not all corporations own their own country. Many corporations are small businesses and they incorporated to minimize personal liability and taxes.
So for the sake of the many employees working for small business corporations, these entities seeking PPP funding should be treated like sole proprietors (as described above) for the purpose of determining their loan amount so long as the amount funded is under $100,000.
Sole proprietors with no employees should be eligible for loan forgiveness immediately. Sole proprietors or gig workers with no employees have very simple rules on using the PPP money. Like other entities, they are supposed to use the money for payroll purposes. Except that the owners also count as employees. So by accepting the money, they have simultaneously used the entire loan amount for payroll. Therefore, they should be eligible for forgiveness immediately.
The SBA website states that a borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used.
But some banks (particularly the large ones) are not accepting forgiveness applications until at least six months after the loan was disbursed. Other banks seem to have some kind of waiting period before taking forgiveness applications.
I get that banks need time to understand the SBA rules as they constantly change. But their rule on when loan recipients can apply for forgiveness is pretty clear.
Maybe imposing a waiting period is their way to weed out fraud. Or it’s an attempt to treat all business equally.
I’ll call it: For 99.9999% of gig workers, PPP is a grant pretending to be a loan. Those who apply for forgiveness are almost certain to get it since they met the requirement one second after receiving the funds.
These people are likely to be lower-income individuals. They are probably more likely to forget to submit the applications, or not understand the rules. They may not have access to professionals who can help them complete the applications. So unless it is easier for these people to apply for forgiveness, they may end up repaying the loan when they don’t have the money to do it.
Letting banks accept forgiveness applications early is more efficient. People will submit applications gradually instead of everyone trying to get them in during a cramped time frame. Their applications will not be mixed in with the large companies where a banker has to spend the weekend verifying that the salaries of its 199 employees were not cut by more than 25%. Similarly, professionals assisting their clients with the forgiveness applications will not be burdened with a deluge of requests.
Assuming the pandemic is going away this year, this will likely be the final major stimulus push from the federal government. So they should ensure that those who need it most get as much as they are entitled to. Also, the forgiveness process should be easy and straightforward. Otherwise, delays will happen, people will forget, and some people without resources may be forced to pay back a loan which could have been forgiven.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.