Solopreneurs still slighted under the PPP

February 17, 2021 | By Patrick T. McCloskey

Updated on March 5, 2021

This post is being updated to report that on March 3, 2021, Treasury and the SBA published an interim final rule (the “New IFR”) modifying the regulations governing PPP loans for certain borrowers. Among other things, the New IFR provides that individuals filing a Form 1040, Schedule C, including solopreneurs (i.e., sole proprietors, independent contractors, and self-employed individuals without W-2 employees) may calculate their maximum PPP loan amount based upon either gross income or net profit, as reported on their Form 1040, Schedule C for 2019 or 2020 (as applicable). Prior to this change, only farmers and ranchers filing a Form 1040, Schedule F were permitted to calculate their maximum PPP loan amount based upon gross income, a change implemented by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”). Unlike farmers and ranchers, who can (i) request a recalculation of a PPP loan received prior to the enactment of the Economic Aid Act (i.e., prior to December 27, 2020) that was calculated based upon the net profit and (ii) receive any excess caused by the gross income recalculation, the New IFR only applies to PPP loan applications submitted after the effective date of the New IFR. The deadline for PPP loan applications (both first draws and second draws) is March 31, 2021.

In the 1980 comedy Caddyshack, the Bushwood Country Club invited its caddies to use the club’s swimming pool on Caddy Day. The punchline: caddy access was limited to 15 minutes.

Although sole proprietors, self-employed individuals and independent contractors have been eligible borrowers under the Paycheck Protection Program (“PPP”) since Day 1, for solo business owners without W-2 employees (so-called “solopreneurs”), support from the PPP has been more theoretical and less functional. According to the New York Times, solopreneurs have received PPP loan amounts as low as $78, $27, $13, and yes, even a ridiculous $1, with approximately 300 businesses receiving PPP loans of $99 or less—the business stimulus equivalents of a caddy swim at Bushwood.

After months of criticism grounded in unfairness, opportunism and favoritism, a revamped version of the PPP reopened in January. One of the tweaks could have been a game-changer for solopreneurs, but the modification was limited to farmers and ranchers.1 While these are undeniably well-deserving industries, the failure to apply this accommodation on a broader scale is the latest example of how solopreneurs continue to be slighted under the PPP, a trend that has persisted since the program’s inception.

In the words of the late Rodney Dangerfield, when it comes to the PPP—solopreneurs get no respect.

The head-start and the head-scratching

Although PPP loan applications went live on April 3, 2020, self-employed individuals and independent contractors had to wait until April 10, 2020.2 With PPP loans being granted on a first come, first served basis, this gave a week-long head-start to larger borrower applicants, immediately putting solopreneurs at a disadvantage. To make matters worse, initial guidance from Treasury and the SBA required that PPP lenders verify an applicant’s payment of salaries and payroll taxes,3 leading to head-scratching about whether solopreneurs (who have no employees), qualified and, if so, how their loan amounts would be calculated.

Eleventh-hour guidance and the net profit prerequisite

The PPP rules for solopreneurs were not set straight until two days before the initial $349 billion tranche of funds ran out.4 Yes, the published guidance finally confirmed that solopreneurs could qualify, but with a critical condition that did not apply to companies with W-2 employees: the business was only eligible for a PPP loan if the owner reported a 2019 net profit on the Schedule C included with his or her tax return. From there, the PPP loan amount would be calculated by dividing the annual net profit by 12 and multiplying the quotient by 2.5. So, solopreneurs who did not turn a profit in 2019 were shut out, and just as important, those who eked out a marginal profit received a miniscule loan amount (see the examples above). For the most part, these principles still apply to solopreneurs under the revamped PPP.5

Eleventh-hour guidance for solopreneurs continued even after the PPP was replenished with an additional $310 billion and the application deadline was extended through August 8, 2020. For those who were in operation as of February 15, 2020 but not in operation during 2019, guidance on their situation did not come until June 26, 2020, roughly two weeks before the new application cutoff.6 Bear in mind the April 2020 solopreneur guidance expressly stated that the SBA would be providing further guidance specifically addressing PPP loan eligibility for these individuals.7

The belittlement of business expenses

Since a solopreneur’s PPP eligibility is entirely contingent on net profit,8 business expenses are critical. In its clarifying rule release, the SBA belittled solopreneur business expenses, stating “many such individuals operate out of their homes, vehicles or sheds and thus do not incur qualifying mortgage interest, rent or utility payments.” The SBA further concluded “[a]s a result, most of their receipts will constitute net income.” While the context of this commentary was loan forgiveness and not loan eligibility or amount, the language suggests that the rationale behind the net profit prerequisite appears to be that solopreneurs do not incur material business expenses. Although certain solopreneurs (such as freelancers or gig workers),9 may incur nominal expenses, the SBA’s generalization on this issue is detrimental to those who incur conventional recurring business expenses in the ordinary course, such as rent and utilities. Solopreneurs struggling due to the Covid-19 pandemic are unlikely to have access to bank financing outside of the PPP or another stimulus program,10 so they are confronted with a dilemma in this context—contribute personal funds to the capital of the business (if available), or close.

The gross income giveaway

The revamped PPP is loaded with accommodations for various industries,11 but the one directed at farmers and ranchers jumps off the page in the sense that, had it been applied to all solopreneurs, it would have gone a long way in addressing the business expense issues alluded to above. Under Section 313 of the Economic Aid to Hard-Hit Businesses, Nonprofits, and Venues Act, the PPP was amended to permit farmers and ranchers (including those who operate as solopreneurs) to use gross income, not net profit, as the metric for determining PPP loan eligibility and loan amount. This subtle but crucial distinction can make a world of difference because business expenses are not netted against gross income. So, even if the business expenses of a farming or ranching solopreneur put the applicable business in the proverbial red (or make it nominally profitable), he or she can still qualify for a meaningful PPP loan. Without knowing the specific profiles of the borrowers who received the absurdly low PPP loan amounts reported on by the New York Times, one would expect that the outcomes would have been more favorable had gross income, instead of net profit, been the applicable metric.

Purpose of the PPP

To be fair, the principal purpose of the PPP was to encourage small businesses to retain employees, so a lifeline to a business with 500 employees obviously furthers that objective to a much greater degree than a loan to a solopreneur. On the other hand, solopreneurs were expressly referenced as eligible borrowers under the PPP, so they should be given just as much consideration as other small businesses. Although admittedly not apples-to-apples, funds going to a business with 500 employees could alternatively be allocated among 500 solopreneurs, including freelancers or gig workers, to help the same number of individuals. Considering the low maximum PPP loan amounts for solopreneurs12 and the emergence of the gig economy, one might argue the scales are tipped in favor of solopreneurs on this point. In any event, the deck should not be stacked so heavily against solopreneurs for a fundamental business stimulus program such as the PPP.

Empire state to the rescue?

For New York solopreneurs slighted by the PPP, help may be on the way. A bill has been introduced in the State Senate (S1596) that would create a program to provide loans to small businesses (including those owned by solopreneurs) who did not receive a PPP loan or other assistance under the CARES Act.13 Unlike the PPP, the amounts of these loans would be calculated as 60% of the applicable borrower’s eligible expenses during the prior year (not net profit or gross income), subject to a $100,000 cap. Although it is unclear whether such loans would be forgivable if not used to pay W-2 employees or 1099 independent contractors, the language indicates that qualifying solopreneurs would at least be eligible to borrow on favorable terms—two or three-year maturity with 1% interest. In addition to these loans, the program in the proposed legislation would separately provide for grants to reimburse businesses (including those owned by solopreneurs) for certain expenses, including up to three (3) months of rent paid and any perishable inventory purchased and thrown away due to a forced shut down.

Hopefully this proposed bill will make it to the finish line on terms no less favorable to New York’s solopreneurs.


This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).

1As further explained below, the change allows farmers and ranchers to use gross income as the metric for calculating PPP loan eligibility instead of net profit.

2Since many solopreneurs operate as single-member limited liability companies (SMLLCs), there was immediate confusion as to whether such businesses were sole proprietors, self-employed individuals or independent contractors for PPP application and guidance purposes. This was finally clarified (partially) in an FAQ that was published by the SBA on June 26, 2020 (“Question: I am an LLC owner. Which set of instructions apply to me? Answer: LLCs should follow the instructions that apply to their tax filing situation, for example, whether they file as a sole proprietor, a partnership or a corporation.”)

3See  PPP Information Sheet—Lenders (“What underwriting is required? As explained in the PPP Interim Final Rule, you will need to . . . confirm receipt of information demonstrating that a borrower had employees for whom the borrower paid salaries and payroll taxes on or around February 15, 2020 . . .”) (Italics added).

4The guidance for solopreneurs was first published by Treasury on April 14, 2020. The initial tranche of PPP funds was exhausted on April 16, 2020. See “Small business rescue loan program hits $349 billion limit and is now out of money,” CNBC, Thursday, April 16, 2020.

5There were, however, certain improvements in the revamped PPP that could help solopreneurs, including: (1) the ability to select 2019 or 2020 to calculate loan eligibility and amount (this applies to all PPP applicants); (2) for farmers and ranchers only, the decisive metric being gross income rather than net profit (more on that below); and (3) for solopreneurs who (i) qualify for a second draw PPP loan and (ii) whose business is in the accommodation and food service industry (NAICS Code 72), the monthly net profit multiple being 3.5x instead of 2.5x. The application deadline for loans under the revamped PPP is March 31, 2021. Treasury has published separate fact sheets for first draw loans and second draw loans.

6For these solopreneurs, the PPP loan amount is essentially 2.5x their monthly net profit between January 1, 2020 and February 15, 2020, calculated on a pro rata basis (with certain adjustments for depreciation expenses), using Schedule C. See Paycheck Protection Program—How To Calculate Maximum Loan Amounts—By Business Type (As of June 26, 2020) (Question 10).

7See Federal Register, Volume 85, No. 76, Monday, April 20, 2020 (“SBA will issue additional guidance for those individuals with self-employment income who: (i) were not in operation in 2019 but who were in operation on February 15, 2020; and (ii) will file a Form 1040 Schedule C for 2020.”)

8As referenced elsewhere herein, as a result of the revamped PPP, eligibility and loan calculations for solopreneur farmers and ranchers are now based upon gross income, not net profit.

9Distinguishing solopreneurs, freelancers and gig workers gets complicated. According to Merriam Webster: (i) a solopreneur is “one who organizes and assumes the risks of a business or enterprise without the help of a partner;” (ii) a freelancer is “a person who pursues a profession without a long-term commitment to any one employer;” and (iii) a gig worker is “a person who works temporary jobs typically in the service sector as an independent contractor or freelancer.” Depending upon the category and the applicable industry or trade, business expenses may be more (or less) significant.

10Solopreneurs (including freelancers and gig workers) may qualify for other pandemic assistance programs, such as an SBA Economic Injury Disaster Loan (EIDL) or pandemic unemployment assistance, but these other benefits may impair eligibility under the PPP. Similarly, solopreneurs who receive a PPP may impair their eligibility under these other programs. Any solopreneur seeking a PPP loan or assistance under any pandemic assistance program is strongly advised to consult with their own legal and financial advisors

11 In addition to the accommodation for farmers and ranchers, the revamped PPP includes changes to help certain other industries, such as newspaper publishers and radio and television broadcasters, maximize PPP loan amounts by providing exceptions to the employee limits.

12PPP loan amounts for solopreneurs are capped at $20, 833, based upon the PPP’s ubiquitous $100,000 per-person annual compensation limit for “payroll cost” purposes ($100,000/12 x 2.5 = $20,833). The outside limit for other small businesses is $10 million for first draw loans and $2 million for second draw loans.

13To be eligible, the applicable business would need to (i) have been in existence in New York State when the Governor announced the Covid-19 state of emergency; and (ii) be able to document actual economic harm or revenue shortfall as a direct result of the pandemic.