Most such individuals got their loans based upon 20.833% (2.5 divided by 12) of their 2019 net income, and can count the same exact amount toward forgiveness, plus permitted rent, interest, and utility costs, to put them clearly above the amount of expenses needed to gain full forgiveness. But they do include a quick $10,000 grant to effected businesses that does no need to be repaid. General partners are capped by the amount of their 2019 net earnings from self-employment.”. It is the paycheck protection program, not the paycheck enhancement program. [1] The Application for Forgiveness makes no reference to these planning opportunities, and there is nothing in the revised Interim Final Rules that would limit this either. 11. Employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after-tax contributions by employees. Earlier guidance provided that forgiveness of PPP proceeds used to compensate owner-employees was subject to a cap equal to 2.5 months of their 2019 compensation (not to exceed $20,833). Employer state and local taxes paid by the borrower and assessed on employee compensation (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings. 2. 2. Paycheck Protection Program (PPP) Frequently Asked Questions (FAQs) on Loan Forgiveness You can email me at agassman@gassmanpa.com and put the word “PPP for me” in the subject line to receive an invite for the webinar. S-Corp Protests PPP Loan Forgiveness Form The Paycheck Protection Program has been one of the Federal government’s most successful responses to the COVID-19 pandemic, but it’s effectiveness has been hamstrung from the outset by the SBA and Treasury Department. Opinions expressed by Forbes Contributors are their own. You may dial-in by phone each day by calling 1-469-225-3127. 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. This is based upon the premise that the forgiveness for a company should not exceed the amount that was loaned for the wages of its owners (2.5 months/12 months X $100,000). Alternatively the SBA may not want this “loophole” to be available for those who file an EZ Application, or will do this now to save face and claim that this was not an error. I have an LL.M. The program’s general premise is that PPP borrowers (the business) will be eligible for loan forgiveness if the allocated funds are used for payroll costs, business mortgage payments, rent, utilities, and other pre-determined business expenses. Posted on August 26, 2020. I speak at many tax conferences, national programs and national and local webinars, including Bloomberg BNA Tax and Accounting, the Notre Dame Tax and Estate Planning Institute and at many other conferences and webinars. The $20,833 cap is based on the maximum defined compensation of $100,000 divided by 12 and then multiplied by 2.5. No attribution rules apply for purposes of the 5 percent rule. The planning opportunity left open by all indications under FAQ’s, Interim Final Rules, and Forgiveness Applications and Instructions, was that all pension plan expenses “paid or incurred” during the 8-week or 24-week testing period would count as forgiveness. 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. Assuming the loan recipient uses a 24-week “covered period,” loan forgiveness on payments to owner-employees is limited to the lesser of $20,833 (2.5 months of a … Do I Need a Separate Bank Account for My Business? Q) I have heard different dates about 8 weeks and 6/30 what is the date range where loan money needs to be used for forgiveness? Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. The SBA could have required employers to measure how much of each retirement plan contribution for 2019 was attributable to salaries above the $100,000 annualized limit, but this would have been extremely complicated and would have significantly lowered the PPP loans going to many companies who are already struggling to maintain their pension benefits, let alone keeping the same number of workers on the payroll. They are looking for ways to use the funds to maximize loan forgiveness. I am a board-certified estate planning and trust lawyer who practices at Gassman, Crotty & Denicolo in Clearwater, Florida. Assuming that the company had significant other payroll so that it’s PPP loan was much more than $100,000, one would have assumed that either 8/52nds or 20.833% (2.5 divided by 12) of John’s entire $100,000 amount would count as forgiveness, but the new modified interim rules indicate that such forgiveness will be limited to not exceed a pro-rata portion of his 2019 earnings. While the updated Interim Rules are still far from clear or thorough, the limitations and procedures explained by the Forgiveness Applications and associated formulas give us the lion’s share of what we need to know for the vast majority of borrowers. 5. The SBA’s reasoning for this rule is that the loan was based on a maximum of 20.833% of 2019 compensation for owners, and with the extension to 24 weeks, many business owners might receive a windfall by only paying themselves and relying upon one of the numerous exceptions to maintaining full employment for their employees. The $15,385 and $20,833 numbers are explained under section 3 below. The good news in the new guidance is that the corporate retirement contributions on behalf of owner-employees now count for additional forgiveness when the owner-employee has cash compensation greater than $100,000. The PPP allows loan forgiveness for payroll costs — including salary, wages, and tips — for up to $100,000 annualized per employee, or $15,385 per individual over the eight-week period. John received his money on May 5. Employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees. He also received an EIDL grant of $4,000 (himself plus three employees). 3. What if the owner was not taking a salary? We know you can obtain loan forgiveness for up to $20,833, but we have no guidance on how you would allocate the forgiveness between the S corporation and proprietorship. The PPP guidance does … 3245-0407 . For those who are not tax experts, the discussion below covers how these rules apply specifically to LLCs and other entities that are taxed as S corporations or C corporations. Earlier guidance provided that forgiveness of PPP proceeds used to compensate owner-employees was subject to a cap equal to 2.5 months of their 2019 compensation (not to exceed $20,833). John owns 2% or more of ABC LLC and earns $98,000 a year in salary. Under this limitation, the maximum pension expense permitted for amounts put away for an employee shareholder will be based upon 2.5/12 (20.8%) of the annual retirement plan expense, as opposed to the larger amounts that would otherwise be counted in the Forgiveness Application. Let’s also assume that John had two other employees that each made $25,000 in 2019, and that there were no benefits or state employment taxes, so that John’s total loan was $20,624 (10,208 + $10,416). This means that many small businesses that primarily relied upon non-owner workers in 2019 will not be able to receive full forgiveness if the primary workers in the company are owners during the testing period. $15,385 for borrowers who received a PPP loan before June 5, 2020, and elected to use an eight-week covered period. The most unpleasant surprise from these changes for many borrowers and advisors was the manner in which forgiveness attributable to compensation, health insurance, and retirement plan contribution expenses for S-Corporation and C-Corporation shareholder employees are unexpectedly being limited. However, the SBA, without explanation, now subjects a new type of owner to the limitation invented in the April 20 IFR: “owner-employees.” Or As Part Of An Integrated Retirement Plan? Or should I apply the $100,000 cap to the couple. The SBA also unveiled a new EZ application for forgiveness of PPP loans. Do not add employer health insurance contributions made on behalf of a self-employed individual, general partners, or owner-employees of an S-corporation, because such payments are already included in their compensation. 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. and Kevin Cameron, CPA, and thank them for their tireless efforts to understand and explain these rules and to maintain the spreadsheet that is now being used by hundreds of CPAs and small businesses. Given the uncertainty that at times has surrounded the PPP, borrowers are undoubtedly ready to apply for loan forgiveness … We will guide you through the official guidance related to PPP loan forgiveness,” and will start at 9 a.m. CDT daily, beginning May 4 – 8. “That PPP money — I still haven’t received anything about forgiveness. S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. From an annualized basis standpoint, these rules will allow all of John’s $98,000 salary and $2,000 of his health insurance costs to count towards forgiveness. an “owner-employee” subject to the limits you describe in PPP Loan Forgiveness for Partnerships and S and C Corporations?. FTEE / 25% Reduction. Owner compensation replacement calculations “It’s hard as a business owner to make those adjustments,” he said. His reasoning comes from Internal Revenue Code Section 401(c)(3), which defines an owner-employee for purposes of qualified pension, profit-sharing, and stock bonus plans rules as “an employee who (1) owns the entire interest in an unincorporated trade or business [a sole proprietor], or (2) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.”. S Corporation Loan Based on K-1. For purposes of health insurance in an S corporation, however, the attribution rules apply to employees who are related to owner-employees who have more than a 2 percent stake in the business. For example, if John’s 2019 compensation was $49,000 in 2019 because he only worked for 6 months, then John would receive a loan of $10,208 based on his compensation. A. We are presenting a free 30 minute webinar on “PPP Loan Forgiveness Issues for Owner-Employees of S and C Corporations” on Tuesday, June 23 at 10:30 AM EDT. Do not add employer retirement contributions made on behalf of a self-employed individual or general partners, because such payments are already included in their compensation. "Borrowers using 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. " ... owner-employees of an S-corporation, because such payments are already included in their compensation. Owner-Employee Limitations Only Apply to 5% or More Shareholders of S and C Corporations. S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. According to the PPP Loan Forgiveness guidance, healthcare and retirement plan benefits are only considered forgivable if paid for by the borrower on behalf of an employee (W-2 employee). The U.S. Small Business Administration (SBA), in consultation with Treasury, released Wednesday a revised loan forgiveness application for the Paycheck Protection Program (PPP). What we now know for certain about compensation and benefits for shareholders/owners of S corporations and C corporations, which the SBA seems to be referring to as “owner-employees”, is as follows: 1. For any owner who also owns (under the SBA’s definition of “owner”) another entity which is a PPP loan borrower, the total compensation paid to that employee eligible for forgiveness is $20,833 ($15,385 if the borrower elects an 8-week covered period). PPP L. OAN . His health insurance costs are $6,000 per year. I have an LL.M. ? Also, there seems to be nothing to prevent the person who has owned the company in the past from selling or gifting their ownership to someone else, like a spouse, and while continuing to work for the company so as to not be subject to these limitations during the period of the testing weeks that the person is no longer an owner. The above rule and example assumes that John’s 2019 annual compensation was at least $100,000. I write about tax, estate and legal strategies and opportunities. More Questions about PPP Loan Forgiveness? Please see the words we have underlined below from the following language that is taken verbatim from the new EZ Application, and may provide for a limitation on retirement plan contributions for owners. The IFR clarifies that the purpose of this exemption is to provide relief for those C- or S-Corporation owner-employees with no meaningful ability to influence decisions over how PPP loan proceeds are allocated. The lease was renewed in March 2020. SBA Form 3508S (10/20) Page 1 . Time any 2019 Pension Contributions. [1] Many Loan Applications were filed to include health insurance costs above the limit on cash compensation, and now such borrowers may have a mismatch between what loan amount they received and the amount that can be forgiven. The rules that apply to you do not apply to the rank-and-file employee group. It is unknown whether it was intended that this limitation would apply only for borrowers who use the EZ Application and not for borrowers who use the full Loan Forgiveness Application, or if it was intended to apply to both. Much has already been written about the Flexibility Act, SBA Interim Rule changes, and EZ Forgiveness Application and instructions with respect to the Payroll Protection Act, all of which have been enacted and published since June 5th. Eligible … Time any 2019 Pension contributions an individual who is paid W-2... 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