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Managing PPP Loans for Sole Proprietors and Sales Reps

3 min read
May 31, 2020 4:40:47 PM

The following was edited by Dylan Lowe from a presentation by the author

Updated 2021: Check out our resource page for second draw PPP loans.

There are many questions surrounding the protocols for properly spending PPP funds as an incorporated business, and there are even more about how to spend those fund as a sole proprietorship. In this article we discuss how small business owners, that have as little as one employee (possibly just the business owner) or perhaps multiple employees, can spend PPP funds and still obtain loan forgiveness.

Let us first clear one huge misconception up before we get into the details. When people say what you "can or cannot spend your PPP funds on" they should really be saying "what expenditures will incur interest and which ones will be forgiven". The most important fact about PPP loans is that they are forgivable for certain business expenses, and for all others incur just a 1% interest charge, which you must repay in 2 years with the first 6 months of payments deferred. That means even if you spend all the loan money on non-payroll expenses, which you can, you are doing so with one of the cheapest 2-year loans you can get. So you can spend the PPP loan on any business expense you like, but we define certain expenses as "forgivable" (i.e. payroll) and others simply as "allowable" (i.e. most business expenses other than payroll). But if you do not want to incur that 1% charge and would like clear definitions of what is "allowable" and what is "forgivable", read on. Note: these rules could change if Congress passes another bill, but these are the rules as they stand at the time of writing. 

Schedule C

The PPP loan is meant to replace the income that you reported on your Schedule C of 2019.  However, if your Schedule C is zero because you took enough deductions in 2019 to make it so, you cannot receive PPP money. The Small Business Administration is looking at your taxable income, and that is what they are attempting to reproduce for you with the PPP loan for your business. Note: if you have not yet filed your taxes, then a draft of your Schedule C is acceptable.

Independent contractors

If you have independent contractors that work for you they are not covered under the forgivable expenses of the PPP loan. In fact, independent contractors should apply for their own PPP loans, which they are eligible to receive independently. Again, to repeat what was mentioned above, you CAN technically pay your independent contractors from the PPP loan, but you will be paying 1% interest on those payments to your independent contractors. You simply cannot have your payments to your independent contractors forgiven.

How much can you pay yourself?

If you are self-employed (i.e. the only employee of your business) the most that is forgivable that you can pay yourself as income is $1,923 per week. Of course you could pay yourself more, but that is the maximum amount that would be forgiven. This is also true for any employees you may have, the most you can pay your employees (and have that amount forgiven) is also $1,923 per week per each employee. Additionally, if you want this payroll money forgiven, you must make sure you spend it during an 8 week period starting from the date you receive the loan. To summarize these points, the government will forgive payroll up to $1,923 per week per individual for a total of 8 weeks. Anything outside of that definition is allowable, but not forgiven. 

It is very important to document these payroll expenses if you want to ensure they are forgiven. So if you do not have a formal payroll processing system/method/service, (i.e. ADP or Gusto) then use a separate bank account that you will use PPP expenses for. Side note: you cannot take unemployment benefits AND pay yourself an income from your PPP loan. 

Non-payroll expenses

You can use 25% of the PPP loan for non-payroll expenses and still have those loan expenditures forgiven for the following categories:

  • Rent
  • Mortgage interest
  • Home office
  • Utilities
  • Transportation costs 

There are many questions about exactly what expenses fall under the above categories, but the best way to think about this 25% is it was set aside to allow the business owner to create an environment employees can work from, i.e. keep the lights, the toilets flushing and put a roof over their head (or possibly just yours) while they work. More specifically these expenses can include the above and: gas, water, electricity, internet, phone, mileage expenses (log your miles), metro pass and company car lease. 

Document, document, document 

Finally, make sure you document everything. Using a separate bank account and placing all (and only) your PPP funds in there and then paying all the above mentioned expenses with paper checks including the listed expense hand written in the "For_" section at the bottom left of your check, is a surefire way to document your expenses. 

Disclaimer: As always, you should seek the advice of your own financial advisor and the above is written as general guidelines for sole proprietors that may or may not apply to you. 


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