Tax

PPP Forgiveness – Corps & Partnerships

PPP Forgiveness – Corps & Partnerships

If you operate your business as a partnership or an S or C
corporation, you face entity-specific Payroll Protection Program (PPP) loan
forgiveness rules that apply to you as an owner-worker in the business.

The rules that apply to you do not apply to the rank-and-file
employee group. The government puts you, the owner-worker, in a separate
“owner-employee” category to limit your business’s PPP benefits.

There are four types of owner-employees:

  1. General partners in partnerships
  2. S corporation shareholder-employees
  3. C corporation shareholder-employees
  4. Form 1040, Schedule C filers (e.g., the self-employed,
    sole proprietors, 1099 recipients, single-member LLCs, and husband and
    wife LLCs treated as single-member LLCs)

If you own all or part of your business and work in the
business, you fall into one of the four categories.

The maximum loan attributable to and forgiveness available
for the “compensation paid” to any SBA-defined owner-employee across all
businesses is

·
$15,385 for borrowers who received a PPP loan before June 5, 2020,
and elected to use an eight-week covered period.

·
$20,833 for borrowers under the 24-week covered period.

Owners of Multiple
Businesses Beware

If you have ownership interests in more than one business,
you need to consider that the owner-employee loan maximums apply to all your
businesses.

The new interim final rule puts the $15,385 or $20,833 deemed
compensation cap on the loan forgiveness for the defined owner-employee, but
contains no guidance on how to allocate or otherwise deal with the caps when
you have ownership interests in multiple businesses.

Example. Jim operates an S corporation and a
proprietorship. He receives his PPP loan on June 17. The cap on Jim’s combined
S corporation and proprietorship loan forgiveness attributable to (a) Jim’s employment
in the S corporation and (b) his profits from the proprietorship is $20,833.

We know Jim can obtain loan forgiveness for up to $20,833,
but we have no guidance on how Jim would allocate the forgiveness between the S
corporation and proprietorship. Perhaps by the time Jim applies for PPP loan
forgiveness, we will have some directions.

Partnerships

The PPP loan forgiveness begins for general partners at the
amount of their 2019 net earnings from self-employment (reduced by claimed Section
179 expense deductions, unreimbursed partnership expenses, and depletion from
oil and gas properties) multiplied by 0.9235.

You then take the lesser of the amount determined above or $100,000,
divide by 12, and multiply by 2.5 to find the loan amount. With this calculation,
the maximum loan is $20,833.

The maximum forgiveness attributable due to the partner’s
self-employment income is

  • $15,385 if the partnership obtained its loan before June
    5, 2020, and elected the eight-week regime, or
  • $20,833 if the partnership is under the 24-week program.

Planning note. Under the 24-week program, the
partnership with no employees does not need to spend any amounts on interest,
rent, or utilities to obtain full forgiveness. It can obtain full forgiveness
in 11 weeks using the calculated self-employment income of up to $20,833 for
each partner.

S Corporations

As with all owner-employees, the PPP loan and its
forgiveness for “compensation” are capped at $15,835 under the eight-week
covered period and $20,833 under the 24-week covered period.

Reminder. The $20,833 cap is based on the maximum defined
compensation of $100,000 divided by 12 and then multiplied by 2.5.

Under the 24-week program, the S corporation whose only
employee is an owner-employee obtains full loan forgiveness after 11 weeks when
using the 24-week covered period without spending anything for interest, rent,
or utilities.

If the S corporation with no employees other than the
owner-employee elects the eight-week covered period, the corporation has to
spend money on interest, rent, and utilities to rise above the $15,385.

The Paycheck Protection Program Flexibility Act of 2020
created a new statutory 60 percent payroll rule. Using the 60 percent enables
the S corporation with no employees other than the sole owner-employee that
elects the eight-week covered period to achieve full forgiveness with payments
for interest, rent, and utilities.

S corporation owner-employees are capped by the amount of
their 2019 employee cash compensation and employer retirement contributions
made on their behalf, but employer health insurance contributions made on their
behalf cannot be separately added because those payments are already included
in their employee cash compensation.

Example. Liz operates her solo busines as an S
corporation. Her 2019 W-2 compensation of $68,000 included $18,000 for medical
insurance. Her payroll cost for the PPP loan and its forgiveness includes the
full $68,000 plus what the S corporation paid into her retirement plan and to
the state for unemployment insurance. The total of these amounts is capped at
$100,000, which creates the $20,833 maximum loan amount as explained above.

C Corporations

C corporation owner-employees are capped by the amount of
their 2019 employee cash compensation and employer retirement and health
insurance contributions made on their behalf.

Example. Don operates his business as a C corporation
where he is the only employee. In 2019, the corporation paid Don a salary of
$60,000, contributed $12,000 to his retirement plan, paid $20,000 for his
family’s medical insurance, and paid $350 to the state for unemployment
insurance.

Don’s corporation has $92,350 in qualifying payroll costs.
His loan and forgiveness are capped at $19,240 ($92,350 ÷ 12 x 2.5).

Form 1040 Schedule C
Businesses

Your PPP loan and its forgiveness for “compensation” are
capped at $15,835 under the eight-week covered period or at $20,833 under the
24-week covered period. The cap amounts are computed using your net profit from
line 31 of your 2019 Schedule C.

Your easy-peasy road to 100 percent loan forgiveness is the
11-week program. With 11 weeks of taking the loan amount out of the business,
you obtain full forgiveness without paying any rent, utilities, or interest.

When Can the Owner-Employee’s
Business Apply for Forgiveness?

According to SBA guidance issued on June 22, 2020, you may
submit your loan forgiveness application anytime on or before the maturity date
of the loan—including before the end of the covered period—if you used all the
loan proceeds for which you requested forgiveness.

Example. Ron receives his $20,833 PPP loan on May 19,
2020. During the 11 weeks beginning with May 19, 2020, Ron’s corporation pays
qualified payroll costs that total $20,833. Ron can apply for $20,833 of loan
forgiveness anytime after the 11th week.

If you have a PPP loan and are looking for help, please call
me on my direct line at 408-778-9651.

New Easy Road to 100 Percent Forgiveness

New Easy Road to 100 Percent Forgiveness

How much is clarity worth?

A lot, a whole lot.

And how much is making things easier worth? Of course, it’s
a lot, a whole lot, too.

We now have both the new (a) clarity and (b) easy road to Paycheck Protection Program (PPP) loan forgiveness for
the self-employed with no employees. Get ready to smile.

New Easy Road to 100
Percent Forgiveness

Say thanks to the Paycheck Protection Program Flexibility
Act of 2020. This new law creates a 24-week period for you to spend your PPP
loan proceeds.

If you obtained your loan proceeds before June 5, you can
elect to use the eight-week period to spend your PPP loan proceeds.

Here’s the big difference:

  • If the 24-week covered period applies, your loan
    forgiveness for your deemed payroll is capped at 2.5 months of your
    2019 Schedule C net profit, not to exceed $20,833.
  • If you elect the eight-week covered period, your loan
    forgiveness for your deemed payroll is capped at eight weeks, not
    to exceed $15,385.

Why Is This Important?

When you file as a Schedule C taxpayer and have no
employees, your PPP loan is based on 2.5 times your 2019 Schedule C, line 31,
net profit, limited to $20,833.

Here’s how the loan amount works:

Sch. C Net Profit

Monthly

Loan Amount

$125,000 limited to $100,000

$8,333

$20,833

$100,000

$8,333

$20,833

$75,000

$6,250

$15,625

$50,000

$4,167

$10,417

$25,000

$2,083

$5,208

Okay, you have your loan proceeds either in hand or in play
at this point.

Let’s keep our eyes on the “easy road” to forgiveness. Under
the new 24-week rule, you achieve 100 percent forgiveness when you pay yourself
the total loan amount within 10.8 weeks of the date you received your loan
proceeds. Let’s round the 10.8 to 11 weeks.

Yes, you are reading this correctly. By simply using the
loan proceeds on yourself during the first 11 weeks, you achieve total
forgiveness.

Note this. By using the 11 weeks, you achieve total
PPP loan forgiveness without having to spend any money on rent, utilities, or
interest.

When Can I Apply for
Forgiveness?

According to SBA guidance issued on June 22, 2020, you may
submit your loan forgiveness application anytime on or before the maturity date
of the loan—including before the end of the covered period—if you used all the
loan proceeds for which you requested forgiveness.

Example. Ron receives his $20,833 PPP loan on May 15,
2020. He puts the money in his business checking account. During the 11 weeks
beginning with May 15, 2020, Ron writes checks to himself that total $20,833.
Ron can apply for $20,833 of loan forgiveness anytime after the 11th week.

Is It Really This Easy?

Yes.

What About
Interest, Rent, and Utilities?

With the 11-week program described above, you don’t have to
consider interest, rent, or utilities to achieve 100 percent forgiveness.

In fact, why bother? By simply using the 11 weeks, you have
less paperwork and worry.

Of course, you might want to consider interest, rent, and
utilities if this takes you to earlier forgiveness. To obtain full forgiveness,
you could spend as little as 60 percent on payroll and the balance on interest,
rent, and utilities.

Example. Jane files a Schedule C and has no
employees, and on June 1, 2020, she obtains a PPP loan of $20,000. During the
first eight weeks, Jane spends $12,000 on herself and $8,000 on qualified
Schedule C deductible business interest, rent, and utilities. Jane can elect
the eight-week period and qualify for 100 percent forgiveness.

Here are the basic PPP forgiveness requirements that apply
to your 2020 Schedule C business deduction payments for interest, rent, and utilities:

  • Interest payments on any business mortgage obligation on
    real or personal property where such obligation was in place before
    February 15, 2020 (but not any prepayment or payment of principal).
  • Payments on business rent obligations on real or personal
    property under lease agreements in force before February 15, 2020.
  • Business utility payments for the distribution of
    electricity, gas, water, transportation, telephone, or internet access for
    which service began before February 15, 2020.

Meet the Paid Rule

On page 2 of the 3508EZ instructions, you find this:

Enter any amounts paid to a
self-employed individual. For a 24-week Covered Period, this amount is capped
at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual
or the 2.5-month equivalent of their applicable compensation in 2019, whichever
is lower.

We may suffer from unfounded paranoia because we find the word
“paid” a word to be reckoned with. But in our opinion, you should have your
Schedule C business write you checks from its business account. If there’s no
separate business account, make sure the business writes checks that pay your
personal expenses in the amount of the deemed compensation.

If you would like to discuss this PPP forgiveness rule with
me, please don’t hesitate to call me on my direct line at 408-778-9651.

 

 

IRS postponed almost all tax payments due in the past few months until July 15, 2020

IRS postponed almost all tax payments due in the past few months until July 15, 2020

Due to COVID-19, the IRS postponed almost all tax payments
due in the past few months until July 15, 2020.

Now—it’s time to pay Uncle Sam.

If you have the cash, you may be wondering what’s the best
way to make your payments.

If you don’t have the cash, you may not know what to do.

What’s Due on July 15

The following payments are due by July 15, 2020:

  • Your 2019 individual tax return balance due,
  • Your 2019 calendar-year C corporation balance due, and
  • Your 2020 first and second quarter estimated tax payments.

If you don’t pay on July 15, you’ll start to accrue
penalties and interest on the above amounts beginning on July 16, 2020.

And don’t forget that even if you file an extension for your
2019 tax returns, you still have to pay your 2019 balance due by July 15, 2020,
to avoid penalties.

Mailing Payments

We don’t recommend mailing your federal tax payments if you
can avoid it. With the IRS mail backlog from the COVID-19 shutdown, it could
take a long time to get processed, or the IRS could misplace the payment.

If you decide to pay your 2019 individual balance due by
check:

  • Make the check payable to “United States Treasury” and put
    your Social Security number and “2019 Form 1040” on the memo line of the
    check.
  • Mail the payment to the correct
    address
    .

If you decide to pay your 2020 individual estimated tax
payments by check:

  • Complete the Form 1040-ES payment voucher.
  • Write one check totaling your combined first and second
    quarter payments.
  • Make the check payable to “United States Treasury” and put
    your Social Security number and “2020 Form 1040-ES” in the memo line of
    the check.
  • Mail the payment to the correct
    address
    .

And, remember, the IRS will consider your payments timely
made if postmarked on or before July 15, 2020.

Electronic Payments

You have two ways to make your tax payments electronically:

  1. IRS Direct Pay
  2. Electronic Funds Tax Payment System (EFTPS)

We like the IRS Direct Pay system more than EFTPS for filing
your individual tax return and making estimated tax payments.

In addition, IRS Direct Pay recently changed to allow you to
schedule payments up to one year in advance, so you can pre-schedule all your
quarterly estimated tax payments.

Don’t Overpay Your
Estimates

Due to the economic troubles from COVID-19, cash is king.
The last thing you want to do is send too much to the IRS in estimated tax
payments while not having enough to meet your personal needs.

You’ll avoid an estimated tax payment penalty on your 2020
individual return as long as one of the following occurs:

  • You owe less than $1,000 in tax on your 2020 return after
    subtracting your withholding and credits, or
  • You paid at a minimum the smaller of 90 percent of your 2020
    total tax or 100 percent of your 2019 total tax.

If you will have both lower income and lower tax in 2020
compared to 2019, you would overpay if you use 2019 as your estimated tax
payment benchmark. In this case, estimate your 2020 tax to avoid overpaying
your estimated tax.

Example. In 2019, Paula had Schedule C net income of
$100,000. In 2020, Paula projects having Schedule C net income of $80,000. She
has no other income or deductions.

If Paula simply pays 100 percent of her 2019 total tax, she has
to make a $12,098 estimated tax payment on July 15, 2020.

If Paula estimates her 2020 income and tax benefits, then
she only needs to send in $6,118 as an estimated tax payment, saving her $5,980
in overpaid estimated taxes.

If you would like my help on planning your tax payments,
please call me on my direct line at 408-778-9651.

 

 

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