PPP Updates: Sole Proprietors and Forms 3509/3510

March 9, 2021 | Article

The government recently released several important updates to the Paycheck Protection Program (PPP), including new loan calculation information for sole proprietors, as well as additional information concerning the government’s review of certain PPP loans. 

New Loan Criteria for Sole Proprietors Under the PPP

Taxpayers reporting their activities on Schedule C of their individual tax returns are often referred to as “sole proprietors” or “Schedule C filers.” Previous governmental guidance limited a sole proprietor’s payroll expense for PPP loan purposes (generally, and subject to certain limitations, the PPP loan is based upon a borrower’s average payroll over 2.5 months) to the sole proprietor’s actual employee payroll expenses plus an amount of the sole proprietor’s net taxable income (referred to as the “owner-compensation replacement"). The owner-compensation replacement amount is capped at $20,833. 

A sole proprietor cannot be an employee of its business, so sole proprietors without employees were generally limited to using their net taxable income. Recognizing that certain sole proprietors without employees and/or sufficient net income may not have received as much PPP aid as needed, the government now states (here) “that a Schedule C filer may elect to calculate the owner compensation share of its payroll costs—that is, the share of its payroll costs that represents compensation of the owner—based on either (i) net profit or (ii) gross income…” capped at $20,833 no matter if net profit or gross income is used. 

In other words, a sole proprietor can use gross, rather than net, income for the owner-compensation replacement amount. The government cautions, however, that Schedule C filers with more than $150,000 of gross income who use gross income as the owner-compensation replacement may be subject to additional governmental oversight, including additional questions from the government regarding the economic need for the PPP loan.

Borrowers using gross income as the owner-compensation replacement must use updated application forms for both the first and second draw PPP loan application. These updated application forms also provide details on the necessary documentation a borrower must provide along with their application.

Stay on top of changing PPP regulations and maximize your loan forgiveness options.

Governmental Review of PPP Loans- Forms 3509 and 3510

As previously reported, the government is reviewing all PPP loans of $2 million or more, and certain other loans. This review apparently starts with Form 3509 (for for-profit borrowers) and Form 3510 (for nonprofit borrowers), which are what the government refers to as “Loan Necessity Questionnaires.” These forms are typically given to a borrower after they have submitted their forgiveness application to their lender. The content of these forms is a point of confusion for both borrowers and advisers and little has been said about how the information provided will be used.

In a new FAQ (#53, found here), the government states it is using the information reported in the Forms 3509 and 3510 to “assess whether the borrower had adequate basis for making the required good-faith certification, based on its individual circumstances in light of the language of the certification and SBA guidance” and that the government “may take into account the borrower’s circumstances and actions both before and after the borrower’s certification to the extent that doing so will assist SBA in determining whether the borrower made the statutorily required certification in good faith at the time of its First Draw PPP Loan application.” The government also states it may ask for additional information and that “borrowers will have an opportunity to provide a narrative response to SBA explaining the circumstances that provided the basis for their good-faith loan necessity certification.”

PPP Scheduled to Close March 31

The PPP application window is scheduled to close on March 31, 2021. Currently, the PPP is restricted to certain small businesses, but it will re-open to all borrowers on March 10, 2021. The government may extend the PPP closing date beyond March 31, 2021, but borrowers eligible for a PPP first or second loan have less than a month to apply under the current end date


What You Can Do with the New PPP Guidance

The ability of sole proprietors to use gross income as their owner-compensation replacement is a beneficial change for certain borrowers able to achieve a higher owner-compensation replacement amount than they could achieve using net income. And while borrowers subject to additional governmental review of their PPP loans still need more clarity on next steps, the additional information provided in FAQ #53 does at least confirm borrowers will have additional chances to interface with the government before a final decision is made. 

New regulations continue to be issued related to PPP. Making sure you’re in compliance can be complicated.

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