The SBA announced on April 16 that all of the PPP’s initial funds have been exhausted. Banks may not accept PPP applications unless Congress provides more funding for the program. 

The CARES Act was put together very quickly and left some significant questions in regard to implementation. On April 14, the Small Business Administration (SBA) issued its second Interim Final Rule regarding the Paycheck Protection Program (PPP) which provides some clarity on how the PPP applies to sole proprietors. The rule specifically addresses the amount of money that a sole proprietor may borrow, the use of PPP funds and parameters for loan forgiveness.

Loan Amount

The amount that a sole proprietor may borrow depends on several factors, including whether or not the business has employees.

For a sole proprietor with no employees:

  • The sole proprietor’s annual profit is the amount shown on Line 31 of the Schedule C from his or her individual income tax return.
  • The SBA caps the applicant’s annual profit at $100,000 in the calculation of the monthly average profit.
  • The maximum loan amount is 2.5 times the applicant’s average monthly profit. The maximum loan is therefore $20,833.
  • If the applicant hasn’t filed his or her 2019 tax return yet, the applicant should complete a draft version of Schedule C to include with the PPP application.

For a sole proprietor who has employees:

  • The maximum loan amount is 2.5 times the monthly average of Schedule C net profit, as described above, plus
  • 2.5 times the monthly average of the 2019 employee wages, excluding wages in excess of $100,000 paid to any employee annually, and
  • 2.5 times the monthly average of the 2019 employee benefits listed on Lines 14 and 19 of Schedule C (health insurance and retirement benefits)

Use of Funds

There are specific guidelines for the use of PPP loan funds. The SBA’s Interim Final Rule from April 14 identifies that a sole proprietor may use PPP funds for:

  • Replacement of eight weeks of the owner’s 2019 Schedule C profit – but limited to $15,385 which is 8/52 of the $100,000 annual limit
  • Employee wages for eight weeks (including only wages paid to individuals up to the first  $100,000 to any one employee on an annualized basis)
  • Benefit payments (health insurance and retirement benefits) for the employees, but not for the proprietor
  • Rent and utility payments during the eight weeks
  • Interest payments on loans used for business purposes in existence before February 2020

Payments for rent, utilities and interest may not exceed 25% of the borrowed funds.

Loan Forgiveness

If the sole proprietor uses the funds in the designated manner, the SBA may grant loan forgiveness.

  • Once the borrower receives the funds and spends them during the prescribed eight-week period, the sole proprietor may then apply for the forgiveness of loan funds that are used for the purposes listed above.
  • The SBA will only include the deductible interest on the mortgage loans, found on the borrower’s Schedule C, in the forgiveness. 
  • The CARES Act includes limitations on loan forgiveness based on the number of employees and their compensation during the eight-week period. The Interim Final Rule does not mention those limitations and it is unclear whether the limitations apply to sole proprietors who make payments to employees.

The PPP can be a valuable source of funds for sole proprietors as they navigate these turbulent economic times. The program has been extremely popular and funds are limited. If you believe your sole proprietor business can benefit from a PPP loan, we strongly recommend that you contact your bank as soon as possible.

We are here to help you understand this process. If you have any questions please don’t hesitate to contact us.

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Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.




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