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Millions of self-employed and gig workers got good news this week.
The Biden administration on Monday changed how the Small Business Administration’s Paycheck Protection Program calculates the credit available for the smallest businesses and sole proprietorships.
But there is a catch. The updated formula, which is likely to result in higher loan amounts for non-employer businesses, 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 formula for loans will change, it has yet to provide lenders with the details of how the loan will be calculated under the new rules.
This means that business owners who want to apply in the two-week priority window for the smallest businesses with fewer than 20 employees starting today may want to take a break to ensure their applications are kept up to date with the most up-to-date rules.
“Loans submitted before the official rule changes are subject to the rules in effect at the time of application,” said Carol Wilkerson, spokeswoman 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 are issued, the administration said.
Just a few days could mean the difference between a loan that keeps the sole proprietor afloat and one that doesn’t go very far.
What is known about the formula change so far?
For companies with employees, the maximum PPP loan is 2.5 times the average monthly wage cost per SBA. As a substitute for single wage billing, the SBA used net income information from tax returns, although payroll are different measures.
In addition, the net payline includes deductions that reduced or eliminated the winning numbers, added small loans, or made them ineligible for the program for some.
The updated formula instead uses gross income as a substitute for labor costs, a larger number than net income, which means many businesses are getting more money on forgivable loans.
“It’s a huge change,” said Keith Hall, president and CEO of the National Association for the Self-Employed.
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The change is important because sole proprietorship is the most common business structure in the United States. There are around 41 million self-employed people in the country, according to the IRS, and in 2018 more than 27 million people filed feedback with an IRS 1040 schedule C-Form for sole proprietorships, according to the agency.
Many of these companies are particularly hard hit by the coronavirus pandemic. About 70% of these without employees are owned by women and black people, and 95% of black-owned and 91% of Latino-owned companies are sole proprietorships, according to SBA.
So far, however, very little forgivable funding has gone from the SBA to sole proprietorship. According to a recent poll by NASE, 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 about eligibility and forgiveness, which hopefully is clearer today, Hall said. “Many of the reasons these small business owners didn’t apply for or approve a PPP loan – I think a lot of those barriers have been removed,” he said.
Loans submitted prior to the official rule changes are subject to the rules in effect at the time of application.
Other small businesses, other than sole proprietorships, should exercise caution when applying for a PPP loan even during the two-week priority window.
Changes that make some borrowers, legal foreigners and those with criminal records eligible for loans will also come into effect in the first week of March, according to the SBA.
And there are other questions about the time to apply for sole proprietorships: Especially those who have already approved a loan but would get more under the new formula – there is no procedure to amend a loan that has been distributed or to hold back a currently pending application.
“All the unknowns right now,” said Alex Cohen, CEO of Liberty SBF.
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