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Revised Maximum First Draw PPP Loan Borrowing Calculation FAQ Issued by SBA for Economic Aid Act Changes

The SBA has updated its FAQ computing the maximum first draw PPP loan amounts[1] following the passage of the Economic Aid Act in December of 2020.

The revised guidance begins with a note that while the SBA’s calculations often refer to 2019 information to compute the maximum borrowing, in the IFRs issued on January 6, 2021 describing the revisions found in the Economic Aid Act, the SBA allows the use of calendar year 2020 as well:

The guidance describes payroll costs using calendar year 2019 as the reference period for payroll costs used to calculate loan amounts. However, borrowers are permitted to use payroll costs from either calendar year 2019 or calendar year 2020 for their First Draw PPP Loan amount calculation. Documentation, including IRS forms, must be supplied for the selected reference period.[2]

In a footnote the document indicates that the year chosen must be used for all calculations:

All components of payroll costs must be from the same calendar year. Payroll costs, including for covered benefits, can only be included for employees whose principal place of residence is in the United States.[3]

Revision to the Calculation for Farmers and Ranchers

The document is updated in question 3 to reflect the revised calculations available for sole proprietor self-employed farmers and ranchers.  The Question provides:

3. Question: I am a self-employed farmer or rancher who reports my income on IRS Form 1040 Schedule F. What documentation must I provide in place of Schedule C and how should my maximum loan amount be determined (up to $10 million)?

Answer: Self-employed farmers and ranchers (i.e., those who report their net farm profit on IRS Form 1040 Schedule 1 and Schedule F) should use IRS Form 1040 Schedule F in lieu of Schedule C.

The calculation for self-employed farmers and ranchers without employees is the same as for Schedule C filers that have no employees, except that Schedule F line 9 (gross income) should be used to determine the loan amount rather than Schedule C line 31 (net profit).

The calculation for self-employed farmers and ranchers with employees is the same as for Schedule C filers that have employees with several exceptions. First, in place of Schedule C line 31 (net profit), the difference between Schedule F line 9 (gross income) and the sum of Schedule F lines 15, 22, and 23 (for employee payroll) should be used. Second, employer contributions for employee group health, life, disability, vision and dental insurance (portion of Schedule F line 15 attributable to those contributions) and employer contributions for employee retirement contributions (Schedule F line 23) should be used in place of those respective lines on Schedule C.

The documentation requirements are the same as for Schedule C filers except the 2019 IRS Form 1040 Schedule 1 and Schedule F must be included with the loan application in place of IRS Form 1040 Schedule C. Additionally, for farmers and ranchers with employees, IRS Form 943 should be provided in addition to, or in place of, IRS Form 941, as applicable.[4]

Partnerships Using 2020 Payroll Numbers

The FAQ notes in footnote 6 that if a partnership wishes to use the 2020 payroll numbers, it will need to complete the Form 1065 for 2020 for the partnership before applying for the loan:

If the partnership is using 2020 payroll costs and the Form 1065 for 2020 has not yet been completed, fill out the form.[5]

S Corporation More Than 2% Shareholders

A footnote also points out that for more than 2% shareholders of an S corporation, amounts for various fringe benefits are part of cash compensation, and thus the cost cannot be added to cash compensation amounts:

Note that employer contributions for group health, life, disability, vision, and dental insurance for S-Corporation employees who own more than a 2 percent stake in the business (or employees who are family members of such owners) are not included in this figure as such contributions are already included in gross wages.[6]

Corporations or Not for Profit Organization Not in Operation Between February 15, 2019 and June 30, 2019

Question 10 covers how to deal with corporations and not for profit organizations that were not in operation between February 15, 2019 and June 30, 2019:

10. Question: I am a corporation or nonprofit and was in operation on February 15, 2020, but was not in operation between February 15, 2019, and June 30, 2019. What reference period should I be using to compute my First Draw PPP Loan amount?

Answer: In this case, you may choose one of two ways to calculate your First Draw PPP Loan amount. The first option is for borrowers to follow the applicable instructions in Questions 5, 6, 7 and use payroll information for all of 2020 instead of 2019. The second option is for borrowers to calculate their loan amount using their average monthly payroll costs incurred in January and February 2020. For borrowers choosing the second option, the following methodology should be used to calculate the maximum amount that you can borrow:

  • Step 1: Compute January and February 2020 payroll costs by adding the following:

    • Gross pay to employees for those two months whose principal place of residence is in the United States, up to $16,667 per employee;

    • Employer group health, life, disability, vision, and dental insurance contributions for those two months;

    • Employer retirement contributions for those two months; and

    • Employer state and local taxes assessed on employee compensation for those two months, primarily state unemployment insurance tax.

  • Step 2: Calculate the average monthly payroll costs (divide the amount from Step 1 by 2)

  • Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5.

  • Step 4: Add any outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance. Do not include the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

If you choose the second option, you must provide payroll records from January and February 2020, your IRS Form 941 for the first quarter of 2020, and documentation of any employer retirement and group health, life, disability, vision, and dental insurance contributions from that period.[7]

Self-Employed Individuals and Partnerships Not in Operation Between February 15, 2019 and June 30, 2019

Similar guidance is offered for self-employed individuals and partnerships that weren’t in operation between February 15, 2019 and June 30, 2019:

11. Question: I am self-employed (or a partnership) and was in operation on February 15, 2020, but was not in operation between February 15, 2019, and June 30, 2019. I have filed or will file a Form 1040 Schedule C or Schedule F (or Form 1065) for 2020. What reference period should I be using to compute my First Draw PPP Loan amount?

Answer: In this case, you may choose one of two ways to calculate your First Draw PPP Loan amount. The first option is for borrowers to follow the applicable instructions in Question 1 through 4 and use payroll information for all of 2020 instead of 2019. The second option is for borrowers to calculate their loan amount using their average monthly payroll costs incurred in January and February 2020. For borrowers choosing the second option, the following methodology should be used by Schedule C filers to calculate the maximum amount that you can borrow:

  • Step 1: Fill out an IRS Form 1040 Schedule C for January and February 2020. The entries on the schedule must reflect all business income and expenses from those two months, with the exception that on Schedule C line 13:

    • you must include only 1/6 of the amount of any annual depreciation and section 179 expense deduction attributable to investment made in those months, and

    • you must include 1/6 of the amount of the 2020 depreciation deduction attributable to investment made in prior years.

  • Step 2: Take the net profit amount for January and February on Schedule C line 31.

    • If this amount is more than $16,667 for the two months combined, set it to $16,667.

    • If this amount is less than 0 for the two months combined, set it to 0.

  • Step 3: If you have employees, add your employee payroll costs for January and February 2020 to the result in Step 2. Only include payroll costs for those employees whose principal place of residence is in the United States and up to $16,667 of gross pay per employee.

  • Step 4: Divide the total by 2, and then multiply it by 2.5.

  • Step 5: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Your IRS Form 1040 Schedule C as completed must be provided to your lender when you apply for a PPP loan. This information should be consistent with what you will submit to the IRS and must be true and accurate in all material respects. You must also supply bank statements from your business account(s) for the months of January and February 2020 to substantiate your net profit amount from Schedule C. If you have employees, you also must provide payroll records from those two months, your IRS Form 941 for the first quarter of 2020, and documentation of any employer retirement and group health, life, disability, vision, and dental insurance contributions made on behalf of employees.

Schedule F filers should use the same methodology as above but complete a Schedule F in Step 1 and replace net profit from Step 2 with the gross income amount on Schedule F line 9 (if no employees) or the difference between the gross profit amount on Schedule F line 9 and employee payroll costs from the sum of Schedule F lines 15, 22, and 23 (if you have employees). Documentation requirements are the same as above except Schedule F as completed must be provided in place of Schedule C.

Partnerships should use the same methodology as above but complete a Form 1065 in Step 1 and replace net profit from Step 2 with the net earnings from self-employment for each individual U.S.-based general partners (the difference between box 14a of IRS Form 1065 K-1 and the sum of (i) any section 179 expense deduction claimed in box 12; (ii) any unreimbursed partnership expenses claimed; and (iii) any depletion claimed on oil and gas properties) multiplied 0.9235. Documentation requirements are the same as above except Form 1065 as completed must be provided in place of Schedule C.[8]

Fringe Benefits to Add to Medicare Wages in Computing Payroll Costs

Question 12 outlines pre-tax employee contributions related to fringe benefits that are excluded from Medicare wages that are added back to compute cash compensation:

12. Question: In addition to pre-tax employee contributions for health insurance, what are the other pre-tax employee contributions for fringe benefits that may have been excluded from IRS Form 941 Taxable Medicare wages & tips that is part of employee gross pay?

Answer: Employee contributions and deductions from pay for flexible spending arrangements (FSA) or other nontaxable benefits under a section 125 cafeteria plan, qualified transit or parking benefits (up to $270 a month), and group life insurance (for up to $50,000 of coverage) may have been excluded from IRS Form 941 Taxable Medicare wages & tips. However, pre-tax employee contributions to retirement plans are included in Taxable Medicare wages & tips and should not be added to that figure to arrive at gross pay.[9]

Federal Taxes and Payroll Costs

Question 13 outlines how federal taxes impact payroll costs:

13. Question: How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?

Answer: Payroll costs are calculated on a gross basis without regard to federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer. However, payroll costs do not include the employer’s share of payroll tax. For example, the wages of an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, count as $4,000 in payroll costs. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.[10]

Limit on PPP First Draw Loans a Corporate Group Can Receive

Finally, question 14 provides for the limit on the overall amount of loans a corporate group can receive:

14. Question: Is there a limit on the dollar amount of First Draw PPP Loans a corporate group can receive?

Answer: Yes, businesses that are part of the same corporate group cannot receive First Draw PPP Loans in a total amount of more than $20 million. For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.[11]


[1] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, https://home.treasury.gov/system/files/136/PPP--How-to-Calculate-Maximum-Loan-Amounts-for-First-Draw-PPP-Loans-and-What-Documentation-to-Provide-By-Business-Type.pdf (retrieved January 18, 2021)

[2] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, p. 1

[3] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, p. 1

[4] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, pp. 3-4

[5] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, p. 4, Footnote 6

[6] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, p. 6, Footnote 7

[7] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, pp. 9-10

[8] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, pp. 10-11

[9] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, p. 11

[10] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, pp. 11-12

[11] “Paycheck Protection Program How to Calculate Maximum Loan Amounts for First Draw PPP Loans and What Documentation to Provide – By Business Type,” SBA FAQ, January 17, 2021, p. 12