COVID-19: Tax Benefits for S Corporation Owners

To help your small business, Congress created a lot of new tax-saving provisions due to the COVID-19 pandemic.

Many of you own and operate S corporations and expect the tax law to treat you differently, as it does with your health insurance deduction.

You’ve been asking us to help clarify which of the COVID-19 tax benefits the S corporation owner can use to put cash in his or her pocket.

We’ll go over the most important COVID-19 tax provisions and tell you what we know about how they apply to you.

Payroll Tax Deferral

You can defer payment of your S corporation’s employer share of Social Security tax on federal tax deposits you would otherwise have to make during the period beginning on March 27, 2020, and ending

Your S corporation’s deferred Social Security taxes are due in two installments. You must pay 50 percent

If you are an S corporation owner, the S corporation can defer the employer portion of Social Security tax on your salary just as it can on any other employee.

PPP Exception

If your S corporation receives a Paycheck Protection Program (PPP) loan, and it obtains loan forgiveness, it does not qualify for the payroll tax deferral provision.

PPP exception loophole. The PPP loan forgiveness prohibition doesn’t apply until your S corporation receives a decision from your lender on PPP loan forgiveness. Before that date, you can defer payroll

Example 1. You operate as an S corporation and have three employees, including yourself. Your S corporation’s April payroll is $10,000, including your W-2 salary or wages.

The employer Social Security tax on this payroll is $620. Your S corporation doesn’t have to pay it with its federal tax deposit. Instead, it will pay $310 by December 31, 2021, and the other $310 by December 31, 2022.

Employee Retention Credit

Your S corporation gets a refundable payroll tax credit against the employer share of employment taxes

We review the rules for this tax credit in COVID-19: Significant Payroll and Self-Employment Tax Relief.

But the law also states that “rules similar to the rules of sections 51(i)(1) and 280C(a) . . . shall apply.”

Code Section 280C(a) states you can’t deduct wage expenses equal to the employee retention credit you receive—no double dipping.

Code Section 51(i)(1) affects the S corporation shareholder by denying the employee retention credit for wages paid to the following family members of a 50-percent-or-more shareholder:

• A child or a descendant of a child
• A brother, sister, stepbrother, or stepsister
• The father or mother, or an ancestor of either
• A stepfather or stepmother
• A son or daughter of a brother or sister of the taxpayer
• A brother or sister of the father or mother of the taxpayer
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

The provision does not prevent the S corporation owner from taking the employee retention credit on his or her wages, provided that the S corporation otherwise meets one of the following requirements:

• A government order fully or partially suspended your operations during a calendar quarter due to COVID-19.
• Your calendar-quarter gross receipts are less than 50 percent of gross receipts from the same quarter in the prior year.

• Your adjusted gross income was greater than $99,000 if your filing status was single or married filing separately; $136,500 for head of household; and $198,000 for married filing jointly.
• You can be claimed as a dependent on someone else’s return. For example, this would include a child or student who can be claimed on a parent’s return.
• You do not have a valid Social Security number.
• You are a nonresident alien.
• You filed Form 1040-NR, Form 1040NR-EZ, Form 1040-PR, or Form 1040-SS for 2019.

For more on the economic impact payments, see COVID-19: Important Tax Breaks from the CARES Act.

Small Employer Tax Credits and Payroll Tax Relief to Cover Required COVID-19-Related Paid Leave for Employees (No Double Tax Benefit Allowed)

The FFCRA preceded the CARES Act. The FFCRA grants tax credits and payroll tax relief to small employers—those with under 500 employees—to cover payments that these employers must now make for COVID-19-related emergency sick leave and emergency family leave pursuant to the FFCRA.

Credit for Required Leave Payments

Small employers can collect a federal tax credit equal to 100 percent of required emergency sick leave and emergency family leave payments made pursuant to the FFCRA. But the credit covers only leave payments made during the period beginning on April 2, 2020, and ending on December 31, 2020.

The credit is increased to cover the portion of the employer’s qualified health plan expenses that is properly allocable to the emergency sick leave and emergency family leave wages paid pursuant to the FFCRA.

The credit is first used to offset the Social Security tax component of the employer’s quarterly federal payroll tax bill for all wages paid to all employees.

Any remaining credit is offset against the employer’s otherwise required federal payroll tax deposits for FICA (Social Security and Medicare) taxes withheld from employee wages, federal income tax withheld from employee wages, and the employer’s share of FICA tax on employee wages.

Any remaining excess is refundable, meaning the government will issue payment to the employer for the excess.

Key point. Employers can request advance payments of the credit by filing new IRS Form 7200 (Advance

The 50 percent employee retention credit allowed by the CARES Act (which we explain later) cannot be claimed for the same wages taken into account for claiming the FFCRA credit for 100 percent of required

Strategy. Small employers should first claim the FFCRA credit for 100 percent of required leave payments and then claim the CARES Act 50 percent employee retention credit for other eligible wages.

The FFCRA credit for required employee leave payments is not available to employers that are already receiving the pre-existing federal credit for paid family and medical leave under Internal Revenue Code Section 45S.

Payroll Tax Relief

Emergency sick leave and family leave payments mandated by the FFCRA are exempt from the 6.2 percent Social Security tax component of the employer’s federal payroll tax that normally applies to wages.

Employers must pay the 1.45 percent Medicare tax component of the federal payroll tax, but they can claim a credit for that outlay.

Leave Credits for Self-Employed Individuals

If you are a self-employed individual who is affected by the coronavirus emergency, the FFCRA allows you to claim a refundable credit against your federal self-employment tax bill.

If the credit exceeds your self-employment tax bill, the government will issue you a payment for the excess.

The credit is equal to:

• 100% of the sick-leave equivalent amount, plus
• 67% of the sick-leave equivalent amount for taking care of a sick family member or taking care of your child following the closing of the child’s school or childcare location.

The sick-leave equivalent amount equals the lesser of

• your average daily self-employment income, or
• $511 per day for up to 10 days (up to $5,110 in total) to care for yourself due to the coronavirus, or
• $200 per day for up to 10 days (up to $2,000 in total) to care for a sick family member or to care for your child following the closing of the child’s school or childcare location due to the coronavirus emergency.

Average daily self-employment income means your net self-employment earnings for the year divided by 260.

In addition, you can claim a coronavirus emergency family leave credit for up to 50 days. The credit amount equals the number of qualified family leave days multiplied by the lesser of

• $200, or
• your average daily self-employment income. The maximum total family leave credit is $10,000 (50 days x $200 per day).

These credits are allowed only for days during the period beginning on April 1, 2020, and ending on

Key point. As we wrote this, there was no way for self-employed folks to request advance payment of these credits. Will the IRS do something to allow advance payments? Maybe later. Stay tuned.

Key point. To prove your entitlement to the sick leave tax breaks, you must maintain documentation of how you were affected.

CARES Act Employee Retention Credit (Can Conflict with Eligibility for Other Federal Relief, and No Double Tax Benefit Allowed)

The CARES Act allows a refundable federal payroll tax credit that has been dubbed the employee retention credit.

The credit amount equals 50 percent of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. The credit is subject to an overall wage cap of $10,000 per eligible employee.

Eligible Employers

The results above come from the COVID-19 Payroll Protection Program (PPP). When you are a self- employed taxpayer with no employees, the PPP treats you as the one and only employee, and treats your net profits as your payroll.

Big Picture

Under the PPP, you go to your bank or another Small Business Admistration (SBA) bank or lender and obtain the PPP loan based on your 2019 net profits. It’s a no-doc loan—super easy. No credit report, no nothing.

Here’s a link to the SBA application that we downloaded to our website (your bank may have its own version).

Do This Now

Two steps:

1. Read this article.
2. Get your bank (or another bank) to accept your application.

Don’t Procrastinate

The SBA runs out of PPP money in a hurry. The second round of funding started a few days ago.

If you snooze, you lose. And then you’ll have to wait until round 3 of funding, should it take place. (We think it will.)

If you are self-employed, with no employees, you absolutely need to qualify for this loan and its forgiveness. Think free money. Think cash help during this crisis.

Here are three questions and answers from the new SBA Interim Final Rule that will help you understand this program during these COVID-19 times. Read on.

Q&A 1

Question 1. I have income from self-employment, have no W-2 employees, and file a Form 1040, Schedule C. Am I eligible for a PPP loan?

Answer 1. You are eligible for a PPP loan if2

• you were in operation on February 15, 2020;
• you are an individual with self-employment income (such as an independent contractor or a sole proprietor);
• your principal place of residence is in the United States; and you have filed or will file a Form 1040 Schedule C for 2019.

Q&A 2

Question 2. Since I have no employees, how do I calculate the maximum amount I can borrow, and what documentation is required?

Answer 2. Follow the three steps listed below:3

1. Find your 2019 IRS Form 1040 Schedule C line 31 net profit. (If you have not yet filed your 2019 tax return, don’t fret. Fill out the Schedule C now. You need it for the loan.) If the net profit amount is over $100,000, reduce it to $100,000.
2. Calculate the average monthly net profit amount (divide the net profit by 12).
3. Multiply the average monthly net profit amount by 2.5.

Q&A 3

Question 3. What amount of the loan qualifies for forgiveness (remember, I don’t have any employees)?

Answer 3. You are going to like this. With no employees, your loan forgiveness is4

• eight weeks’ worth (8/52) of your 2019 net profit (yes, last year, from that Schedule C you used for the loan amount—you don’t have to consider your 2020 profits);
• mortgage interest paid during the covered period (eight weeks from loan receipt) on real or personal business property (the interest you will deduct on Schedule C);
• rent payments during the covered period on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
• utility payments under service agreements dated before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business utility payments).

The SBA will reduce your loan forgiveness by any COVID-19 qualified sick or family leave tax credit you claimed. Your loan is for two years, but you don’t have to wait much longer than the eight weeks to apply for forgiveness. There are no prepayment penalties.

Example

Loan amount. Say your Schedule C shows $120,000 of net profit. Your limit is $100,000. Divide that by 12, and your monthly amount is $8,333. Multiply that by 2.5, and your loan amount is $20,833.

Loan forgiveness. Your loan forgiveness is $15,385 (8/52 of $100,000) plus qualifying interest, rent, and utilities, not to exceed total loan forgiveness of more than $20,513.

In the SBA loan application, the amounts from this example show as follows:

• Average monthly payroll: $8,333
• x 2.5 = $20,833

Number of employees: self

Paperwork

The paperwork is easy:

• Your 2019 1040 Schedule C (if you have not filed yet, complete Schedule C now)
• Proof that you were self-employed during 2019, such as a 2019 Form 1099-MISC, invoice, bank statement, or other book of record
• Proof that you were operating as a Schedule C business on or around February 15, 2020 (a 2020 invoice, bank statement, or book of record)
• Completed application with an SBA lender

Other Facts to Know

How can I request loan forgiveness?

You submit your forgiveness request to the lender that is servicing the loan. The lender must make a decision on the forgiveness within 60 days.

What is my interest rate?

1.00 percent fixed rate.

When do I need to start paying interest on my loan?

All payments are deferred for six months, but interest will continue to accrue over this period.

When is my loan due?

In two years.

Can I pay my loan earlier than two years?

Yes. There are no prepayment penalties or fees.

Do I need to pledge any collateral for these loans?

No. No collateral is required.

Do I need to personally guarantee this loan?

No. There is no personal guarantee requirement.

Takeaways

It’s true: the government is here to help your self-employed business during these difficult times, even when the only worker is you. The funds you receive and the minimum amount forgiven are automatic— based solely on your 2019 Schedule C net profit.

You need to move quickly. The government’s newest (round 2) PPP funding will be used up in a matter of weeks.

Get in the game now. Even if you miss out on this round 2 of funding, having your application on file for a possible round 3 of funding would give you a head start.