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Millions of self-employed and concert workers received good news this week.
The Biden administration on Monday changed the way the Small Business Administration’s salary protection program calculates forgivable loans for the smallest firms and individual owners.
But there is a catch. The updated formula – which is likely to lead to higher loan amounts for non-employer firms, including sole contractors and independent contractors – will not take effect until the first week of March.
While the SBA has provided some information on how the loan formula will change, it has not yet communicated to lenders the specifics of how to calculate loans under the new rules.
This means that business owners who want to apply in the two-week priority window for smaller businesses with less than 20 employees starting today may want to quit to make sure their applications are subject to the most up-to-date rules. .
“Loans submitted before amendments to the official rule shall be subject to the rules in force at the time the application is submitted., ” said Carol Wilkerson, an SBA spokeswoman.
To ensure that sole proprietors benefit from the changes, it is recommended that lenders do not submit their application to the system until the SBA has given written guidance, according to the administration.
Just a few days could make the difference between a loan that keeps the sole owner afloat and one that doesn’t go too far.
What is known about the formula is changing so far
For companies with employees, the maximum PPP loans are 2.5 times the average monthly salary expenses, per SBA. As a reserve for wage costs for solo workers, the SBA used information on net profit from tax returns, even though salary and profit are different measures.
In addition, the net profit line includes deductions, which have reduced or eliminated profit numbers for some, making small loans or making them ineligible for the program.
The updated formula will instead use gross income as a support for salary costs, a higher number than net income, which means that many companies will receive more money in forgivable loans.
“It’s a tremendous change,” said Keith Hall, president and CEO of the National Association of Self-Employed.
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Change is important, as unique properties are the most common business structure in the United States. The IRS says there are about 41 million self-employed in the country, and in 2018, more than 27 million people filed a return with an IRS 1040 Form C program for sole proprietors, according to the agency.
Many of these businesses have been particularly affected by the coronavirus pandemic. About 70% of such companies without employees are owned by women and people of color, and 95% of companies owned by blacks and 91% of Latin American companies are sole owners, according to SBA data.
But so far, very little forgivable SBA funding has gone to individual businesses – according to a recent NASE survey, nearly two-thirds of its members said they had not received any money from the program.
Much of this was due to the confusion in the early days of the program in terms of eligibility and forgiveness, which we hope are clearer today, Hall said. “Many of the reasons those small business owners have not applied for or received approval for a PPP loan – I think many of these barriers have been removed,” he said.
Loans submitted before amendments to the official rule are subject to the rules in force at the time the application is submitted.
Carol Wilkerson
SBA spokesman
The questions remain
Other small businesses, beyond individual homeowners, may also want to exercise caution when applying for a PPP loan, even during the two-week priority period.
The changes that make some student loans, non-residents and those with a criminal record eligible for loans come into effect in the first week of March, according to the SBA.
And, there are other questions about the timing of applications for individual owners, especially those who have already received an approved loan, but would get more under the new formula – there is no process of changing a scattered loan or withholding an application that is currently in progress.
“All unknown right now,” said Alex Cohen, CEO of Liberty SBF.
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