PPP Loans: Sole Proprietors and the Self-Employed

The legislative intent of the Paycheck Protection Program (“PPP”) is to provide economic relief to small businesses. While small business owners have faced plenty of challenges as it relates to this program, sole proprietors and the self-employed have faced even greater obstacles. The first obstacle, of course, was the later application date. The window for sole proprietors to submit their PPP loan applications began on April 10, 2020, a full week later than the April 3, 2020 application start date for small business owners.

The SBA issued additional guidance on April 14, 2020—four days after the application window opened—regarding PPP loan details for sole proprietors and the self-employed. According to the interim-final rule, individuals with self-employment income are eligible to apply if: (1) you were in operation on February 15, 2020; (2) you are an individual with self-employment income (such as an independent contractor or a sole proprietor); (3) your principal place of residence is in the United States; and (4) you filed or will file a Form 1040 Schedule C for 2019.

The fourth eligibility requirement is the most burdensome for sole proprietors and the self-employed. The U.S. Treasury Department is requiring that these applicants have their Form 2019 IRS 1040 Schedule C of their 2019 tax return when they apply. This of course means that self-employed individuals seeking a PPP loan will have to first finish their 2019 tax returns before applying for a loan.

Determining the maximum loan amount is important in completing your PPP loan application. If you are self-employed and have no employees, the maximum loan amount will be determined by your 2019 IRS Form 1040 Schedule C line 31 net profit amount. If this amount is over $100,000, then it must be reduced to $100,000. An applicant will then divide this number by 12 (to get average monthly profit), multiply that number by 2.5, and then add any outstanding amount you might have from an Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020. If you have employees, then additional numbers must be considered that include, but are not limited to, 2019 gross wages and tips, fringe benefits, employer health insurance contributions, and state and local taxes. To see the full breakdown, review pages 6-8 of the SBA interim-final rule.

The calculation of loan forgiveness is also different for self-employed applicants. In order to prevent the PPP loans from unfairly benefiting individuals who have little to no overhead costs, the Administrator, in consultation with the Secretary, has limited the loan forgiveness for any self-employed individual to eight (8) weeks of net profit from the owner’s 2019 Form 1040 Schedule C.

If you fall into the class of a sole proprietor or the self-employed, it is important to understand that the rules and requirements for obtaining a PPP loan are substantially different than the rules and requirements that are applicable to other small business owners.