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PPP Loans for Sole Proprietorships

Updated: Jun 12

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.

What documentation is required?

For owner compensation replacement, you will be required to produce your 2019 Schedule C. For all other expenses like utilities, rent, and mortgage, you will need to retain the necessary documentation. Remember that both the SBA and the lender have the right to request and audit the financial documents and records of the business. It is essential that you maintain proper accounting and bookkeeping to be able to provide such information.

What if you weren't in business for all of 2019?

As per the eligibility criteria for PPP Loans, only businesses that were operating prior to February 15, 2020 are eligible for a PPP. As long as you meet that criteria, you should be eligible.

Are home office expenses eligible for forgiveness?

Yes! As long as they come under the categories of utilities, rent, and mortgage interest, home office expenses are eligible to be forgiven.

What if I use the funds on other business expenses?

Any amounts used on unapproved business expenses will not be eligible for forgiveness and the outstanding portion will need to be paid back at 1% interest over the course of five years. While this can usually be avoided, if it does happen you can rest knowing it is among the most affordable loans available to businesses. If business bounces back quickly, there is no prepayment penalty should you choose to pay it off early.

Disclaimer: While we are attempting to present the latest and most accurate information, please understand that the full details are still being released. We will continue to monitor and update the information as it becomes available. For specific details as it relates to your business, we urge you to contact us for a discussion.


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About the Authors

Sonder Accounting was founded in 2016 by Kara Janowsky to serve the financial maagement needs of the nascent cannabis industry. Our small and specialized team has partnered with over 250 businesses in similar industries to build functional financials that drive business growth:

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