How to Get Second-Round PPP Funds as a Sole Proprietor
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The initial round of Paycheck Protection Program funding authorized last March focused on S-Corps and C-Corps due to the simplicity and ease of the calculation based on payroll figures. Now the system is ready for Schedule C sole proprietors.
But just because it's available doesn’t mean it’s for everyone. However, if you decide the PPP is a perfect fit for you, the application has some unique characteristics compared to that of a corporation with payroll. It all comes down to the equation.
What a Sole Proprietor Can Get Under the PPP
The calculation for a sole proprietor is really quite straightforward. The math is as follows:
2019 Schedule C Income (line 31)
+ Wages for employees reported on a W-2 — Not you (Schedule C line 26)
+ Pension & Profit sharing for employees — Not you (Schedule C line 19)
+ Health Insurance for employees — Not you
Total Divided by 12 and multiplied by 2.5
For example, if a sole proprietor made $75,000 last year (without any employees), the calculation would simply be $75,000/12, multiplied by 2.5, for a total PPP loan of $15,625.
Next, business owners who receive the PPP loan then have eight weeks to spend the money on specific expenses in order to have it completely forgiven. Regrettably, the equation of what a business owner can receive and what will be forgiven is still extremely complex at best. The SBA has contradicted themselves several times, and frankly, who even knows what the final application to get funds forgiven will look like? More on this here.
How to Qualify
In order to receive the PPP loan, the biggest requirement for a sole proprietor is to prove their net income for 2019. This most certainly is going to require the filing of 2019 1040 tax returns, with the Schedule C and supporting schedules.
Next, the proprietor needs to show that they were in business on or before February 15, 2020, and certify that the business has been economically affected by the coronavirus, or even that economic uncertainty makes the loan necessary.
This loan is NOT to start a business, but to save a current business and help it get back on its feet.
How to Obtain Loan Forgiveness
The true beauty of this loan is that if you use the money for payroll, rent, mortgage obligations, utilities and other fixed-debt obligations in the first eight weeks after the loan funds, the debt is completely forgiven.
Now with that said, we all understand the biggest expense and purpose of the PPP is to encourage hiring of employees, yet it creates a problem when the primary “employee” is the actual proprietor and they aren’t allowed to put themselves on payroll with a Schedule C. As such, many tax advisors and bankers are still waiting for guidance from the SBA on how to substantiate these amounts.
In the end, whatever funds the proprietor doesn’t get forgiven converts to a two-year loan that is nearly interest-free. The bill allowed for a maximum rate of 4 percent, but the guidance issued by the U.S. Treasury is stating that the maximum rate would be 0.5 percent.
Finally, it’s reasonable to assume that business owners who receive PPP funds are going to face a difficult challenge when they have eight weeks to spend the money, yet can’t open their business due to a shelter-in-place order and their employees are making more on unemployment. Go figure.
The Takeaway: Determine if the PPP works for your business by calculating the numbers based on your Schedule C for 2019. None of this happens, nor does the application even get underway, until the sole proprietor files their 2019 1040 Schedule C. Based on SBA guidance, the bankers are requiring the tax return to do the math for your PPP. Get in line as soon as you can if you are seeking the PPP loan, and consult with a professional while you wait.
Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show, Refresh Your Wealth, and author of the new book, The and Legal Playbook — Game-Changing Solutions for Your Small-Business Questions: 2nd Edition, and The Business Owner’s Guide to Financial Freedom — What Wall Street Isn’t Telling You. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.