PPP Extended- Act Fast or Miss OutTax Planning
Good news. The PPP Extension Act of 2021 makes Paycheck Protection Program (PPP) monies available until the earlier of
- May 31, 2021, or
- when the money runs out.
According to testimony before the Senate, the money could run out as early as mid-April. That’s just a few weeks from today.
If you are looking for first- or second-draw PPP money, make sure to saddle up on that horse now. Don’t wait.
Also, make sure that your application is correct. The Small Business Administration (SBA) has rejected piles of applications because of faulty filing.
In the remaining sections of this article, we will explain
- how much money you can get based on your entity type (such as proprietorship or S corporation), and
- how much money you can get because of your employees.
And remember, as we reported last month in Breaking News: New PPP for the Self-Employed and Small Businesses, Schedule C businesses can now use gross income to obtain more PPP monies than they could before, when they had to use net income.
Form 1040, Schedule C Businesses
We have very good news for Schedule C businesses. With first- or second-draw PPP monies, you can now use your gross income rather than your net income to obtain your PPP money.
Example. Sally has $90,000 of gross income on line 7 and only $10,000 of net income on line 31 of her Schedule C. She can use the $90,000 in her PPP application, and that will give her nine times more PPP money than line 31.
Schedule C businesses include folks who receive 1099s, single-member LLCs, and sole proprietors.
To find how much PPP money you qualify for as a Schedule C taxpayer, follow the three steps below:
- From either your 2019 or 2020 IRS Form 1040, Schedule C, use line 7 (gross income) but if this amount is over $100,000, reduce it to $100,000.
- Divide the amount in number 1 above by 12 to find your average monthly gross profit.
- Multiply the result in number 2 above by 2.5 to find your PPP money amount (it cannot exceed $20,833).
Example. Sally has $90,000 of gross income on her 2019 Schedule C. Because she has not filed her 2020 tax return yet and does not wish to estimate, Sally opts to use her 2019 gross income. She qualifies for $19,750 in taxfree PPP money ($90,000 ÷ 12 x 2.5).
If Sally had or has a PPP loan, she may qualify for a second loan, identical to the first. And if Sally received less than $20,833 based on her net income, with Round 2 she can use her gross income to increase the PPP monies.
If you, as a self-employed individual, are going to use gross income, use the following (new) SBA forms:
- For first-draw PPP monies based on gross income, use SBA Form 2483-C.
- For second-draw PPP monies based on gross income, use SBA Form 2483-SD-C.
If you, as a self-employed individual, are going to use net income, use the following forms:
- For first-draw PPP monies based on net income, use SBA Form 2483.
- For second-draw PPP monies based on net income, use SBA Form 2483-SD-C.
Corporations, Partnerships, Farms, and Ranches
The new rules make no changes in how corporations, partnerships, and farms and ranches calculate the loan amounts. We last wrote about these entities in February. For your convenience, we repeat those rules here so you have all entities and their first-draw current rules in one place.
Form 1040, Schedule F Businesses
If you file your farm or ranch business on Schedule F of your Form 1040, calculate your PPP cash infusion money using the following three-step formula:
- Step 1. Find your 2019 or 2020 IRS Form 1040 Schedule F line 9 gross income. If this amount is over $100,000, reduce it to $100,000. If this amount is zero or less, you are not eligible for a PPP loan.
- Step 2. Divide the amount from Step 1 by 12 to find your average monthly gross income.
- Step 3. Multiply the average monthly gross income amount from Step 2 by 2.5.
Example. Your 2019 Schedule F gross income is $130,000. You reduce it to $100,000 and divide by 12 to find your average monthly gross income of $8,333. You then multiply the $8,333 average monthly gross income by 2.5 to find your PPP cash infusion amount of $20,833.
Partnership with No Employees
Individual partners do not qualify for the PPP monies. The PPP first draw for partnerships with no employees is at the partnership level and follows the three-step process below:
- Step 1. Add the net earnings from self-employment of the individual general partners in 2019 or 2020, as reported on IRS Form 1065 K-1 (box 14, code A), reduced by Section 179 expense deductions claimed (box 12), unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties, and multiplied by 0.9235. If the result exceeds $100,000 for any partner, reduce the result to $100,000 for that partner.
- Step 2. Divide the amount from Step 1 by 12.
- Step 3. Multiply the amount in Step 2 by 2.5 to find your PPP cash infusion amount.
Example. Your partnership has three partners. The average annual net earnings from Step 1 totaled $246,000, and no individual partner had more than $100,000 in average annual net earnings. The average monthly amount is $20,500 ($246,000 ÷ 12). The PPP cash infusion amount for this partnership is $51,250 ($20,500 x 2.5).
S Corporation with Owner-Employee Only
The one-person S corporation with the owner as the solo employee computes its first-draw PPP infusion of monies as follows:
- Step 1. Select either 2019 or 2020, and take the sum of the gross wages paid to the owneremployee from box 1 of the W-2. If the wage exceeds $100,000, reduce it to $100,000.
- Step 2. Add to the result in Step 1 any retirement contributions (line 17 of the 1120-S) and any state and local taxes assessed to the employer on employee compensation, primarily state unemployment insurance tax.
- Step 3. Divide the amount from Step 1 by 12.
- Step 4. Multiply the amount in Step 2 by 2.5 to find your PPP cash infusion amount.
Note on health insurance. Unlike the C corporation example below, the health insurance for the S corporation owner-employee is included in the owner’s W-2, box 1. With a higher-income W-2, this can create a lower PPP cash infusion when compared with the C corporation owner-employee.
Planning point. Most S corporation owner-employees strive for a low salary so they can save on payroll taxes. That strategy can hurt the dollar amount of the PPP cash infusion for the S corporation owner-employee.
Example. Willie operates his one-person business as an S corporation. The corporation generates a $70,000 profit, but Willie takes no salary. His PPP cash infusion is zero.
C Corporation with Owner-Employee Only
The one-person C corporation with the owner as the solo employee computes its first-draw PPP infusion of monies based on its selection of 2019 or 2020, and follows the five steps described below:
- Step 1. Find the gross wages paid to the owner-employee from box 1 of the W-2. If the wage exceeds $100,000, reduce it to $100,000.
- Step 2. Add to the result in Step 1 any retirement contributions (line 23 of the Form 1120) and any state and local taxes assessed to the employer on employee compensation, primarily state unemployment insurance tax.
- Step 3. Add to Step 2 the employer-paid health, life, disability, vision, and dental insurance contributions.
- Step 4. Total the amounts from Step 3 and divide by 12.
- Step 5. Multiply the amount in Step 4 by 2.5 to find your PPP cash infusion amount.
Example. You operate your business as a C corporation. You are the only employee. The corporation pays you $100,000 in wages, contributes $25,000 to your retirement plan, pays your health insurance benefits of $18,000, and pays $350 in state unemployment insurance. Your PPP cash infusion is $29,865 ($143,350 ÷ 12 x 2.5).
Let’s Add Employees
The rules that apply to the PPP cash infusion with respect to employees are the same for businesses that report on Schedule C, Schedule F, Form 1065 (partnerships), Form 1120-S (S corporations), and Form 1120 (C corporations). Here are the nine steps you need to follow as set forth by the SBA:
- Step 1. Use IRS Form 941, and tally the taxable Medicare wages for each of the four quarters.
- Step 2. Add any pre-tax employee contributions for health insurance or other fringe benefits that areexcluded from taxable Medicare wages.
- Step 3. Total Steps 1 and 2 for each employee, and limit those amounts to no more than $100,000.
- Step 4. Add to the Step 3 total the employer contributions for employee group health, life, disability, vision, and dental insurance. (Note: HRA plans such as QSEHRAs, ICHRAs, and 105 HRA plans qualify as payroll additions for obtaining PPP funds.)
- Step 5. Add to the Step 4 total the employer contributions to employee retirement plans.
- Step 6. Add to the Step 5 running total the employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax.
- Step 7. Using the grand total that you now have in Step 6, calculate the average monthly payroll costs by dividing the total by 12.
- Step 8. Multiply the average monthly payroll costs by 2.5, and you have the employee portion of the PPP cash infusion.
- Step 9. Add the results from Step 8 to the result you get for the owner or owners, and you have the total PPP cash infusion amount.
If you qualify for the first-draw PPP money, complete your application now. The money is going to run out fast—and once it’s gone, so is the PPP. Legislatively, the new round for the PPP ends on May 31. The clock ticks, so don’t procrastinate.
You qualify for the PPP if any of the following are true:
- You file your taxes on Schedule C of your tax return. Businesses that file on Schedule C include independent contractors (often called “1099 folks”), single-member LLCs, proprietorships, and statutory employees, such as life insurance salespeople.
- You file your taxes on Schedule F (ranchers and farmers).
- You are a general partner in a partnership, but the partnership asks for and receives the money based on your and the other partners’ combined self-employment incomes, as adjusted.
- You operate as an S corporation.
- You operate as a C corporation.
- You are the only worker in the business.
- You have employees whom you pay on a W-2.
If you qualify, you want the PPP. It’s a much-needed, tax-free cash infusion. It’s called a loan, but it’s not. You have to repay loans. The PPP does not have to be repaid—it’s forgiven.
Plus, expenses paid with this forgiven PPP loan are tax-deductible.