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The New Sole Proprietor PPP Formula

New sole proprietor paycheck protection program rules make PPP loans easy and bigger.

As of March 3, 2021, a new sole proprietor PPP formula exists.

While most Paycheck Protection Program borrowers calculate their PPP loan amount using their average monthly payroll or net profit, the smallest businesses can look at a different number: Their gross income.

This change makes a huge difference to the smallest small businesses. And business owners and their advisors probably want to get up to speed. Fast.

Reviewing the Old PPP Formula and Rules

Let’s keep this simple.

The PPP program gives small business owners money.

Technically, yes, the program loans small businesses money. But as long as the firm uses the money to pay owner compensation, employee payroll, and a handful of other operating expenses?

Yeah, good enough. The borrower doesn’t repay the loan.

Example 1: You operate a sole proprietorship and borrow $10,000. You use that money to pay yourself a draw. You don’t need to repay the loan.

The original PPP loan formula looked at the average monthly payroll a firm paid. To calculate the loan, the borrower multiplied the average monthly payroll by 2.5.

Example 2: A small business spends $4,000 a month on payroll. The PPP loan equals 2.5 times $4,000, or $10,000.

For small proprietors, originally, the PPP loan formula also counted sole proprietor profits as payroll for the owner.

Example 3: A sole proprietorship earns its owner net profit equal to $2,000 a month on average. The PPP loan equals 2.5 times $2,000, or $5,000.

A predictable tweak: If a small sole proprietorship pays employees, the formula combines the employee payroll and the owner profits.

Example 4: Say a small business spends $4,000 a month on payroll and earns its sole proprietor $2,000 a month on average. The PPP loan formula calculates the eligible average monthly payroll as $6,000. And the formula returns $15,000 as the PPP loan amount.

You can still calculate the PPP loan amount using the above formulas. But Schedule C sole proprietors get another better option…

The New Sole Proprietor PPP Formula

Rather than look net profit, a sole proprietor can calculate her or his owner payroll by looking at gross income. And this is big. Really big. The little table below shows the change:

Revenues $66,000
Less: Cost of Goods Sold -$6,000
Gross Income $60,000 New formula looks at this
Less: Operating Expenses -$48,000
Net Profit $12,000 Old formula looked at this

The old PPP loan formula looked that $12,000 bottom-line profit, calculated a $1,000 per month profit, and returned a $2,500 PPP loan amount.

The new sole proprietor PPP loan formula looks at the $60,000 of gross income, calculates a $5000 per month profit and returns a $12,500 PPP loan amount. At a minimum.

Note: If you have a copy of your last tax return handy, look at what Schedule C Line 7 shows. That value represents your annual gross income. You can, by the way, look at either your 2019 gross income or your 2020 gross income.

No Double-counting of Employee Payroll Costs

A sole proprietor with W-2 employees calculates the PPP loan amount slightly different. And in a slightly more complicated manner.

A sole proprietor with employees gets PPP money for employee payroll costs. If that $48,000 of operating expenses shown in the table above includes, say, $24,00o for employee payroll? The owner gets PPP money for that too.

But the business doesn’t get to double count employee payroll.

Example 5: Say a sole proprietorship earns $60,000 of gross income as shown in that earlier table. Further assume the business spends $48,000 on operating expenses but uses $24,000 of this money for employee payroll. The PPP loan formula, therefore, adjusts the $60,000 of gross income down to $36,000. But the annual payroll in this case equals $60,000 (the $36,000 of adjusted gross income plus the $24,000 of employee payroll.) The average monthly payroll equals $5,000 because $60,000 divided by 12 months equals $5,000. The PPP loan equals $12,500–so the same value but calculated through a more circuitous route.

But the PPP loan formula adjusts the gross income amount for a reason. And that reason? The Paycheck Protection Program only funds employee payroll costs up to $8333 a month. Further, only wages paid to domestic employees working in the US count. The PPP loan application makes borrowers break out the payroll costs to show this.

Example 6: Say that sole proprietorship described in Example 5 pays $24,000 in payroll but that only $12,000 counts as payroll for PPP purposes. Maybe $6,000 goes to a foreign employee–so it shouldn’t count. Maybe another $6,000 represents payroll in excess of the per-employee $8333 monthly limit. In this case, the PPP loan formula works like this. First, it subtracts $24,000 from the $60,000 of gross income to get $36,000 of owner compensation and proprietor expenses. Then the formula calculates the annual payroll as equal to $48,000 (the $36,000 of adjusted gross income plus the $12,000 of eligible employee payroll.) The average monthly payroll equals $4,000 because $48,000 divided by 12 months equals $4,000. The PPP loan equals $10,000, or 2.5 times $4,000.

Financial Grace for Folks with Bad Financial Histories

Now, an awkward subject…

If some bad financial history previously prevented you from applying? Take another look at applying.

The new rule specifically “removes the eligibility restriction that prevents businesses with owners who have non-financial fraud felony convictions in the last year from obtaining PPP loans, and removes the eligibility restriction that prevents businesses with owners who are delinquent or in default on their Federal student loans from obtaining PPP loans.”

Those quotes come right out of the rule’s opening paragraphs.

Important Other PPP Loan Details

The PPP program ends on March 31, 2021. You want to act fast.

If you already borrowed PPP money using the original formula, you cannot redo the loan. You get stuck with the original PPP loan formula. (Sorry.)

If you use the new PPP loan formula based on gross income and gross income exceeds $150,000, you must justify your need for the loan by certifying your firm faces “economic uncertainty.” (More discussion of this issue here, here and here: Covid-19 and Economic Uncertainty.)

If a sole proprietor employs no W-2 employees, the maximum first draw PPP loan equals $20,833. (To receive that loan amount, the sole proprietor needs to generate at least $100,000 in gross income in either 2019 or 2020.)

You provide a copy of your tax return’s Schedule C with your loan application.

You need to supply documentation proving you earned income such as a “IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed.”

Further, and here I quote from the new rule again, “You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.” (Only people in business on that date qualify for PPP loans.)

Second draw PPP loans, something we’ve discussed in more detail here, can also use the gross income to calculate PPP loan amounts. A second draw PPP loan works almost identically to a first draw loan. The one difference to be aware of? A second draw PPP loan borrower with a NAICS code starting with 72 gets 3.5 months of their average payroll cost for the owner rather than 2.5 months.

Note: The NAICS code that starts with 72 identifies accommodation and food service businesses.

Other PPP Loan Resources

The new PPP loan application forms, available here, first draw and second draw, step you through the math.

Accountants, attorneys and bankers probably should read the new Interim Final Rule, available here.


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