How Can I Use My PPP Funds as a Sole Proprietor?
By Leah Wietholter, MBA, CFE, PI
The SBA's interim final rule issued April 20, 2020 specifically limits the forgivable portion of the PPP loan funded owner compensation for small businesses. While they can still use all of the funds they receive to pay themselves, the realization that the owner's entire pay is not forgivable, like it is for payroll costs in the original PPP loan guidance, is catching many small business owners off guard when we tell them about this rule.
Sole proprietors, or those who file an IRS Form 1040 Schedule C, are able to apply and receive Paycheck Protection Program (“PPP”) funds. Don’t be fooled by the name, though. You’re able to apply even if you do not actually pay payroll to yourself or have employees. The Small Business Administration issued guidance for sole proprietors on April 20, 2020. You can read it here.
To summarize, sole proprietors can use the PPP funds as follows:
1. Owner Compensation Replacement
Allowable owner compensation replacement is calculated as the average monthly net profit based on your 2019 Schedule C multiplied by 2.5 [2019 Sch C Net Profit / 12 x 2.5].
Example: If your 2019 Schedule C net profit was $40,000, then your owner compensation replacement is $8,333.33.
2. Employee payroll costs
If you have employees, the payroll costs for employees were defined in the SBA’s guidance published on April 3, 2020 and can be downloaded here.
3. Mortgage interest payments on real or personal property
If you own your office building, and you pay a mortgage, only the interest portion of the loan can be paid for using PPP funds. The guidance also provides for paying the interest portion on personal property used in the business, such as a vehicle.
Whether you can use PPP funds to make payments in this category depends on whether or not you claimed such expenses on your 2019 Schedule C. Additionally, the amounts of payments in this category are limited to the monthly average for similar payments as claimed on your 2019 Schedule C.
4. Business rent and utility payments
Using PPP funds to make payments in this category depends on whether or not you claimed such expenses on your 2019 Schedule C. Additionally, the amounts of payments in this category are limited to the monthly average for similar payments as claimed on your 2019 Schedule C.
Other things to know before spending your PPP funds:
Non-payroll costs cannot exceed 25% of the PPP loan amount
Only 25% of the loan proceeds can be used for non-payroll expenses. As you track your expenditures, make sure your payroll expenditures and owner compensation replacement total 75% of your PPP loan amount. Note that the amount of any Economic Injury Disaster Loan (EIDL) refinanced with PPP funds used for payroll costs will also count towards this 75%.
Owner Compensation Replacement Forgiveness is not 100%.
The SBA has not yet published its official guidance regarding PPP loan forgiveness. However, it is important to note that currently, only a portion of the sole proprietor’s owner compensation replacement is forgivable. The applicable interim final rule states that the amount eligible for forgiveness shall include “owner compensation replacement calculated based on 2019 net profit ...with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit…”
Example: To determine the forgivable portion, multiply your 2019 Schedule C net profit by 8/52 [2019 Schedule C Net Profit x 8/52]. If your allowable owner replacement compensation, from our example above, is $8,333.33, only $6,153.84 is forgivable.
If this comes as a shock to you, don’t worry! You can still use the remaining $2,179.49. It will just need to be repaid over the two-year loan term at 1% interest.
Use our free template to help you track your expenditures and make necessary calculations.
The downloadable template created by Workman Forensics will guide you through these calculations and help you track your spending, so you can present your bank with an organized list and supporting documents to help them understand how you followed the guidelines.
Free template link: www.workmanforensics.com/wf-products/ppp-funds-worksheet-soleproprietor
If you use Excel on a Mac, you may prefer this version: www.workmanforensics.com/wf-products/ppp-funds-worksheet-soleproprietor-mac
Don’t have time or feel like this is outside of your expertise? Give us a call. We’re happy to prepare all of this for you.
Contact: Megan Brown, CPA, PI, Forensic Accounting Manager
services@workmanforensics.com