PPP Rules Catch-22? (Maybe not)

UPDATE May 5: As I continue to comb through PPP rules, I've revised my initial analysis (below). I'm wrong in concluding that self-employed individuals without employees face conflicting mandates. However, the mandates the rules impose limit the amount eligible for forgiveness to less than the amount an owner is required to pay him/ herself.

Today, I submitted the following comment to the SBA here (anyone can comment):

"These rules are detrimental to self-employed individuals without employees as a class because the math is flawed and loan forgiveness is capped at an amount that does not equal 75% of the loan value even though the rules also require 75% of the loan to be used for owner's compensation.

1b defines owner's compensation as 2019 Net Income from Sch. C Line 31 or, if monthly, this amount is divided by 12. No problems here. For example, let's use $50,000 in 2019 Net Income or $4167 average monthly net income. The maximum loan amount is $10,417.50.

1e requires 75% of the loan value to be used to replace owner's compensation. For our example, at least $7813.13 of the loan funds must go to replace owner's compensation.

1f caps the amount eligible for forgiveness at 8/52 (or .15384615) of 2019 Net Income. For our example, no more than $7692.31 is eligible for forgiveness, leaving the business owner in debt for the difference of $120.82.

Self-employed business owners without employees are required to pay themselves more than they are eligible to have forgiven. No other business owner is treated this way. Rule 1f should be amended to cap eligible loan forgiveness at TWO MONTHS of 2019 average monthly Net Income instead of 8 weeks. This would bring 1f into alignment with 1b which uses either the annual Net Income or the average monthly Net Income, rather than the weekly Net Income."

ORIGINAL ARTICLE [with EDITS and CORRECTIONS noted]:

I've just discovered a MAJOR flaw in SBA's rules for how self-employed individuals without employees must use Paycheck Protection Program loan funds.  

On April 14th, the SBA published interim rules that create an insurmountable conflict for self-employed individuals without employees.

Here are the details:

Rule 1(b) instructs how to calculate max loan amount ("Net Income" from 2019 Sch. C Line 31 divided by 12 times 2.5). Here, we'll use a hypothetical of 2019 Net Income of $50,000 which permits a maximum loan of $10,416.67.

For self-employed individuals without employees, Rule 1(d)i limits use of PPP funds for owner compensation replacement based on ONLY their 2019 Net Income from Sch. C. Unlike other businesses, they cannot include payments for health insurance, retirement contributions, or state/ local taxes as part of "payroll" in order to hit the 75%-spent-on-payroll requirement.

Rule 1(e) requires that 75% of PPP loan funds be used for payroll. For our example, 75% of $10,417 equals $7,812.50 as the minimum amount spent for owner compensation to comply with this rule.

Here's the kicker: Rule 1(f)ii doesn't allow that much for owner compensation. [EDIT: Rule 1(f) doesn't allow for that much to be forgiven.]

Rule 1(f)ii requires self-employed individuals without employees to calculate the maximum "owner's compensation replacement" they are allowed to pay themselves out of PPP funds by using a formula: 8/52 (or .15384615) of 2019 Net Income. I guess some genius at SBA reasoned that the PPP loans are supposed to provide 8 weeks of payroll so they allow only 8 weeks worth of 2019 Net Income. That might make sense except....

THE MATH DOESN'T WORK.

For our example, 8/52 of $50,000 works out to $7,692.31 or $120.19 LESS than the "must-spend-75%-on-payroll" regulations mandate.

I mapped the math over 10 different Net Income scenarios and in every scenario on this spreadsheet, a self-employed individual without employees is prohibited by Rule 1(f) from paying herself enough to comply with Rule 1(e).  

[CORRECTION: She can and must pay herself enough to comply with Rule 1(e) but she can't get forgiveness for that total amount.]

Literally, no self-employed individual who doesn't have employees can comply with both rules. [CORRECTION: You can comply with both rules but you can't get forgiveness for the full 75% you're required to pay yourself.] The only way the math works is if the applicant caught this discrepancy before applying and asked for less than the maximum allowed.

The SBA must amend its rules for self-employed individuals without employees to read something like this: owner's compensation should be 8/52 of 2019 Net Income or 75% of the PPP maximum loan amount, whichever is greater. [EDIT: Rule 1(f) should cap forgiveness at TWO MONTHS worth of 2019 average monthly Net Income instead of at 8/52].

Get to work SBA, we need you to get this right.