When people think about small businesses, they sometimes conveniently forget about sole proprietors and independent contractors. Well, the good news is that under the rules for Paycheck Protection Program Loans, these small businesses are covered under "Owners Compensation Replacement." Instead of having to spend funds on payroll, sole proprietors and independent contractors can automatically get 2.5 months of net profit 'forgiven'.
While the eligibility criteria are a tad different and the loan amounts are calculated differently, the fact remains that these timely loans can be used by such entities to lessen some of the economic difficulties brought about by the global pandemic.
Please Note: This is our third article in the PPP Series. Check out our Introductory Article and PPP for Partnerships Article. Keep in mind there are varying criteria for First Draw & Second Draw PPP Loans.
Calculating the Loan Amount for Sole Proprietorships
PPP loans for sole proprietorships are based on the 2019 net profit if you have no other employees. Net profit should be the same as what you reported on your 2019 Schedule C tax return. You take the net profit and divide it by 12 to arrive at a monthly average net profit. This number is multiplied by 2.5 to arrive at your PPP Loan amount. This makes the PPP Loan amount roughly ten weeks’ worth of net profit.
This of course assumes that the sole proprietorship did not have additional payroll expenses. If you did have employees other than yourself, you can include BOTH the average monthly payroll for the employee(s) and the average monthly profit from your tax return.
How to apply for forgiveness
Sole proprietors who have no other employees on payroll can apply for the simplified forgiveness. This is a simple, single-sheet document that easily enables one to apply for forgiveness. If however, you do have payroll expenses, then the standard form will be required.
If you requested additional funding based on employee payroll expenses, you'll need to ensure the remaining PPP funds are spent on current payroll costs, or other covered expenses such as utilities, rent, and mortgage interest expenses in order to be forgiven.
The forgiveness window has been expanded to 24 weeks, meaning you can use costs incurred over this longer duration rather than the previous 8-week window.
To help determine the PPP Loan eligibility or work through forgiveness for your sole proprietorship, please schedule a conversation with us.
FAQ for Sole Proprietor PPP Loans
What’s the maximum amount of owner compensation one can get?
The PPP limits compensation to an annualized salary of $100,000. For sole proprietors or independent contractors with no employees, the maximum possible PPP loan is, therefore, $20,833, and the entire amount is automatically eligible for forgiveness as owner compensation replacement.
