How Do Sole Proprietors Prove Usage of Funds for PPP Loan Forgiveness?

UDPATE: Not so fast on this. It looks like loan forgiveness for a sole proprietor is based on taking 2019 net income, dividing by 52 and multiplying by 8. Read this article in Forbes:

And also see the AICPA frequently asked questions on this subject.

Because of this new guidance, I am striking through most of the original post, because the info on the links above is the current info. This stuff changes all the time!


Sole proprietors could start applying for Payroll Protection Program loans last Friday the 10th. The application process seems simple enough, as far as the needed items. (Getting a bank to work with you and accept your application may be another story….)

My question comes on the loan forgiveness side. Any business receiving a PPP loan can receive loan forgiveness if the funds are used for paying certain qualifying expenses within a certain timeframe. Payroll is the primary qualifying expense.

How does “payroll” work for a sole proprietorship where there’s no such thing as payroll? Here’s the best way to explain. This is based on conversations with bankers, and simple analysis of how “payroll” works when you are self-employed and don’t have real payroll.


(Update: below is what bankers told me; but read the Forbes article I linked to above; it looks like loan forgiveness is automatic on an amount equal to: 2019 net income, divided by 52, times 8.)

The first thing that will happen is the loan proceeds will go into the sole proprietor’s bank account. It really is best if this is a separate business account! But in the real world, there’s not always a separate account….

Out of that account, you will “pay” yourself by writing a check to yourself, or initiating a transfer between the business account and your personal account and then documenting in your records what the transfer was for.


George is a sole proprietor. His 2019 net income from his business (that is, his business income minus his business expenses) is $50,000. His loan limit is figured as: $50,000 / 12 = 4,166.67 x 2.5 = 10,416.67 loan limit.

So George will receive $10,416.67 into his business account. Then during the forgiveness period, he would need to “pay” himself — I suppose he could take it all at once, though one of my banker friends recommended having it be done in two separate transactions a few weeks apart — this money. If he writes himself a check, he should note that it is for payroll. To be clear, George doesn’t really have payroll because amounts he pulls out of his business are not “salary” but rather a “tax nothing” (i.e. it’s not reported on his taxes at all); we are talking about proper notation for purposes of PPP loan forgiveness.

What if George doesn’t have a separate bank account but rather runs everything through his personal checking account? This is, of course, not how it’s supposed to be done but in the real world it often is done that way. (I have encountered S-corps who run all corporate finances through their personal checking account; did I mention S-corps and partnerships are my least-enjoyable tax returns to prepare because almost 100% of them are disaster areas? But I digress.) Anyway, I am not sure what George would do in this situation. So let’s blissfully pretend he has a separate bank account for his business.


Multiple banks are either no longer taking PPP applications, or are limiting applications to current customers only. If you work with a bank or a credit union that isn’t affiliated with the SBA, or your bank is not taking more applications (a la Wells Fargo), you may have a hard time finding a new bank to help you right now. Online sources such as Kabbage are taking applications, and that may be your best alternative in that situation.

My banker friends also told me that funding for PPP is likely to be dried up within days (maybe by the end of this week). So unless Congress puts another shot of money into the program, your application may be put into limbo.

Further Reading and Other Info

  • If you haven’t filed your 2019 tax return yet, you should be able to provide a P&L to the bank instead. This is good because your tax pro likely won’t be happy if you say you need your 2019 tax return prepared !!!ASAP OMG!!! especially when a return involving a sole proprietorship is usually not “simple” and can’t be rushed through. Don’t ask your tax pro to rush through your return; use a P&L instead. UDPATE: now the rule is, you must provide a Schedule C even if the 2019 return has not been finished.
  • In this blog post from a few years ago, I wrote about the concept of a “salary” with sole proprietors and how there is no such thing, even if you say you paid yourself a “salary.”