HOW SOLE PROPRIETORS CALCULATE PPP LOAN AMOUNTS
AS OF 11:00 A.M., FRIDAY, APRIL 10, 2020
How am I sleeping? Like a baby. I wake up every three hours looking for Treasury guidance. As I write there is none for contractors and sole proprietors who can begin filing for PPP loans today. So here is my interpretation based on the law. (The only thing I’m sure of is this will change, but let’s get started anyway.)
US Treasury PPP Fact Sheet: “Payroll costs include…For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.”
CARES Act: “DOCUMENTATION.—An eligible self-employed individual, independent contractor, or sole proprietorship seeking a covered loan shall submit such documentation as is necessary to establish such individual as eligible, including payroll tax filings to the Internal Revenue Service, Forms 1099-MISC, and income and expenses from the sole proprietorship.”
There you go!
The current SBA answers to FAQ provides some clues we can use in understanding what they mean:
- The amount businesses pay to independent contractors is not counted as payroll expense because contractors can apply for PPP loans.
- Payroll costs are based on gross wages.
- Banks will work with applicants to correct application numbers if needed.
My conclusion: Sole proprietors / independent contractors who provide services should use gross compensation received less amounts paid to subcontractors, other independent contractors, and other contract laborers.
Let’s look at three scenarios below: First, a business provides only services–construction, landscaping, real estate sales, computer consulting and on and on; secondly, a business provides services and sells products–a beauty salon, plumber, HVAC sales and service, and so forth; thirdly, a business buys or makes stuff and sells it—such as craft woodworking, antiques, cosmetics, etc.
Let’s save time for a lot of folks.
The maximum sole proprietorship “payroll expense” that can be counted is $100,000. That is $8,333 per month times 2.5 months or a maximum loan of $20,833.
My definition of net income:
Do we add back depreciation and amortization? Interest expense? I suggest we use characteristics from the amazing men and women who founded this blessed country: dream big, take risks, be brave, adapt if necessary.
So, when I refer to Payroll net income below I mean:
Net income per Schedule C or Income Statement (P & L)
Equals Payroll net income
Payroll expense = 2019 gross receipts or income less amounts paid to others for services.
Documentation: Forms 1099-MISC received for nonemployee compensation (box 7); 2019 Schedule C or 2019 income statement (profit & loss); worksheet calculating loan amount
Service and sales:
Payroll expense = 2019 gross receipts or income from services less amounts paid to others for services PLUS Payroll net income from product sales
Documentation: Forms 1099-MISC received for nonemployee compensation; 2019 Schedule C or 2019 income statement (profit & loss); spreadsheet allocating income and expenses between services and sales; spreadsheet showing adjustments to book or tax net income to get Payroll net income.
Product sales only:
Payroll expense = Payroll net income (defined above)
Documentation: 2019 Schedule C or 2019 income statement (profit & loss); spreadsheet showing adjustments to book or tax net income to get Payroll net income.
Clarifying comments: Many service businesses may not receive many 1099 forms because they either serve individuals who don’t file 1099s or the average annual income from a customer is less than $600. Hence the importance of having 2019 financials or a Schedule C from a tax filing.
Why add back depreciation? Depreciation varies greatly depending on circumstances. Is it a large carryover from a prior year purchase? Is it a current year purchase using 100% bonus depreciation? Is it book depreciation instead of tax method depreciation? I say level the playing field and add it back.
Attached is a spreadsheet you can use to get the ball rolling with your bank. We will update it as guidance is published from our benevolent Uncle.
I know many of you will have questions and need help. Fire away, but please be patient as we learn to get better at juggling than any Ringling Brothers Circus performer in the history of the world.
I’ll head off a couple by saying I dunno (yet).
- Do active partners and LLC members get to apply for loans on their portion of passthrough net income from service businesses?
- How do property owners get relief for a drop in rent revenue?
Stay tuned for the next exciting episode when Robin turns to Batman and says, “Yikes! I sure am glad the government doesn’t run my business!”