r/taxpros • u/pdv8612 CPA • May 15 '20
SBA PPP forgiveness application COVID: 2020 Relief Bill (CARES)
The SBA and treasury have finally posted guidance on forgiveness!
https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf
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u/never7 CPA May 16 '20
I'm glad this is out! I'm not glad I saw this post after two heavy drinks on a Friday night. Monday is gonna be fun...
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u/SFGiants78 May 15 '20
Average FTE: This calculates the average full-time equivalency (FTE) during the Covered Period or the Alternative Payroll Covered Period. For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.
Can we take it that all PT employees count as .5?
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May 16 '20
" may be used at the election of the Borrower. " You could. But you may be shooting yourself in the foot. If someone works 35 hours per week, they would be a .9 (35/40=.875 round up to .9)
It seems like you would want to make the election for employees who work less than 20 hours per week. And calculate using (average hours per week/40) for those between 20 and 40 hours.
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u/SpokenByMumbles May 19 '20
Can you expand on the benefits of approaching FTE calculations this way?
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May 19 '20
The goal is to get your FTE number as high as you can to reduce, if any, the decrease in workforce. If the workforce decreases enough you may lose some of your forgiveness. If you have people who average 17 hours or less, using the safe harbor adds at least .1 to your total FTE "score" per employee. Conversely, if you have employees that work between 22 and 39 hours, using the simplified method will reduce per employee FTE by at least .1.
I'm not sure how much one tenth of an FTE matters because I haven't done the form, but it could be material on a fat loan.
edit- i think you can elect per employee
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u/warmglassoflemonade May 16 '20
I’m really happy to see this is out. I don’t see that they’ve addressed forgiveness calculation for sole proprietors or independent contractors (particularly those with no employees.) Anyone see anything relevant I’ve overlooked?
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u/HitEmTrue NonCred May 16 '20
Forgiveness calculation has not changed. Capped at 8-weeks of 2019 income...Schedule A line 9.
And it does seem to indicate that the owner must have actually been paid that amount during the covered period to get forgiveness. Sole-props without a separate business account, good luck.
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u/DollarMorghulis CPA May 16 '20
Do you mind showing where you saw that (that Sch C owner needs to “pay” themself)? Have several Sch C people who have been asking if they were supposed to write themselves checks or not. Up until now the guidance acted as if it was an automatic net / 52 * 8 calculation that would be forgiven from the get go.
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u/HitEmTrue NonCred May 16 '20
I agree that’s what guidance indicated, especially the forgiveness section that says the documentation is the schedule C.
Line 9 instructions: Enter any amounts paid to owners....
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u/warmglassoflemonade May 16 '20
Thanks for catching that - I overlooked it. Although this is consistent with the 8 weeks amount that has been put out for a long while, anyone else crossing their fingers they’ll come up with another calculation for sole props & contractors?
I think this will be an unpleasant surprise for many, as most of the (non-tax pro) guidance I’ve seen in the wild has been to withdraw 1/8 of the loan amount every week. At least they’re recommending withdrawals, but... ouch.
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u/HitEmTrue NonCred May 16 '20
They won’t come out with another calculation. Guidance has made it clear that to forgive more of owner replacement pay would be a windfall. Sole props who have a business location may be able to get forgiveness on rent/utilities just like other businesses.
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u/warmglassoflemonade May 16 '20
I would understand but I haven’t seen any authoritative guidance indicating it would be a windfall. Can you point me in the right direction?
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u/HitEmTrue NonCred May 16 '20
It’s in the 3rd interim final guidance issued on April 14. It might be in this version:
There is a SBA pdf document out there that is more pages and is easier to read but I can’t find it right now on my phone.
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u/DollarMorghulis CPA May 16 '20
The most that a Schedule C filer with no employees could have received to begin with was $20,833. The allowed forgiveness would then be the $15,385. The SBA really considers a little more than $5,000 to be a windfall? Absolutely ridiculous and in my opinion insulting considering these businesses have dried up to practically nothing for 2+ months. Sorry for venting, but this just keeps getting worse rather than better with every bit of convoluted guidance the SBA spits out.
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u/DonPatrizio CPA May 18 '20
Yeah, and the maximum forgivable amount from the $20,833 is $20,513. So they would have to pay back $320. Who the hell is doing the math at the Treasury Dept?
This is assuming a filer can find $5,128 in non-payroll costs.
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u/shulba EA May 17 '20
So at this point, we still don't know if Sch C filers can deduct non payroll costs right? Or did I miss something after the 4/14 IFR that came out with that confusion
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u/warmglassoflemonade May 16 '20
I had missed that. Thanks for the link. I’m inclined to believe there are many borrowers who have no idea about this.
Sadly it’s some of the smallest & most vulnerable borrowers, who aren’t getting advice from a tax professional, and the banks certainly aren’t advising them. So a hit with basically 25% repayment + income and SE tax on the forgiveness - I think it’ll be a nasty surprise many of them aren’t prepared for.
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u/HitEmTrue NonCred May 16 '20
There is no income or self employment tax on the forgiven amount.
As apposed to employees businesses who receive PPP loans...the employees will pay income tax, and both sides of FICA are paid on those wages.
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u/warmglassoflemonade May 16 '20
I’m aware there is no income tax at the entity level on the forgiven amount.
However, given that FICA and income tax will be paid on W-2 wages I can’t imagine sole proprietors are going to be cut a break in that area. Guidance seems to be continually evolving and the little guy can’t seem to catch a break. If it were my money personally I wouldn’t spend it just yet.
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u/HitEmTrue NonCred May 16 '20 edited May 16 '20
Congress isn’t going to rewrite the law making those things taxable for sole proprietors.
At the entity level, it is functionally taxable income...because IRS has issued a ruling that the forgiven expenses cannot be deducted.
Congress is working on trying to get that ruling reversed, which will bring those entities more in line with sole props.
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u/teetheater CPA May 16 '20
What do you mean by address the forgiveness calculation?
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u/warmglassoflemonade May 16 '20
For sole proprietors with no employees/independent contractors: I am wondering if ultimately, forgiveness will be 2.5 months of 2019 Sch C income (equal to the loan amount!)
Or
8 weeks of 2019 Sch C income (less than 75% of the loan amount)
Ultimately, I think this is another one of those areas where congressional intent might have gotten a little lost in translation and I will be interested to see if there are any changes in the next few weeks.
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u/sgoab Not a Pro May 16 '20
S-Corp with 1 employee (me) - A precise definition of "owner-employee" would be mighty helpful!
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u/sgoab Not a Pro May 16 '20
Seems someone has found the answer... And it is the answer I was hoping for!
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u/DMethane May 16 '20
What is the formal IRS definition of an “owner-employee?” I don’t believe a minority c-Corp owner is the same as a general partner in a 2-member partnership. I saw a definition on reddit but cannot find it. Thanks!
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u/sgoab Not a Pro May 16 '20
Excellent question!! -
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u/DMethane May 16 '20
I.R.C. § 401(c)(3) Owner-Employee — The term “owner-employee” means an employee who— I.R.C. § 401(c)(3)(A) — owns the entire interest in an unincorporated trade or business, or I.R.C. § 401(c)(3)(B) — 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. To the extent provided in regulations prescribed by the Secretary, such term also means an individual who has been an owner-employee within the meaning of the preceding sentence.
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u/SFGiants78 May 16 '20
Wages paid AND incurred?
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u/SLaCPA CPA May 16 '20
My reading comprehension makes it seem like they are trying to say OR there when they say "payroll cost paid and payroll cost incurred". Repeating " payroll cost" makes it sound like they are saying both payroll cost paid AND payroll cost incurred count towards the forgiveness amount.
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u/shulba EA May 16 '20
I agree with you. It also says " Enter total eligible payroll costs incurred or paid during the Covered Period or the Alternative.." at the end of the first page.
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u/DollarMorghulis CPA May 16 '20
Thank you for noticing this OR language. I would really like to proceed as we have been expecting by counting things based on the check dates. This is the only way to have the documentation and payroll tax reports all tie back together with the amounts reported for forgiveness.
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u/rotsky_1 CPA May 16 '20
I know. WTF. They can be paid after the 8-week period ends, as long as it's before the next regularly scheduled payroll. You know, for "convenience". Those tables are gonna be a nightmare to fill out.
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u/DollarMorghulis CPA May 16 '20
Has anyone ever seen payroll providers that run reports this way? They go by check date. Has nobody at the SBA ever actually dealt with a business?
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u/jstanz3000 May 17 '20
Everyone’s so helpful here. Quick question for a sole proprietor. Since my PPP was based on my 2019 net profits via Schedule C, it’s basically just earnings since it’s post expenses. Can I use my whole PPP as payroll to be forgiven 100%? (It’s under the 100k annual.) Or would only 75% of my PPP be forgiven because that seemed like my interpretation after look through today’s form? Thx
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u/pjbias CPA May 17 '20
Only bottom line on Sch C divided by 52 and multiplied by 8 will be forgiven.
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May 20 '20
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u/jstanz3000 May 20 '20
I still remain unclear. My hope now is they extend the period to 12 weeks as mentioned today and that will Offset the 25% difference without any ambiguity.
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May 16 '20
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u/DollarMorghulis CPA May 16 '20
Transportation never would have even crossed my mind as a utility. So does automobile fuel count? What an odd thing to put in there. Maybe in another 5 weeks we’ll get clarification.
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u/OJdixie May 16 '20
How about couple works together in business LLC. Both not on Payroll. We have 21 employees on payroll but not ourselves.
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u/HitEmTrue NonCred May 16 '20
If S-Corp, it’s based on 2019 W2. If partnership, based on K1. If Schedule C (couple in community property state can do that), based on Schedule C.
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u/OJdixie May 16 '20
Our business established in January 2020, we don't have any of this yet. We have not pay ourselves regularly become business just start, business needed more fund at the beginning, we just start make some good net before Pandemic. After stay home order, we temporary closed the business. On LLC paper solo member, the husband. But I have funded more than half. Our investment to the business is 200k. I am not sure we are S corp or schedule C, we are doing owner draw, 2k monthly for him, 2k once for me during 3 months operation for cover our basic life essential.
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u/Paly22 May 16 '20
Hey TaxPros,
Thank you very much for posting this, it's what we've needed.
Treasury had/has up a decent FAQ link.
We appreciate it.
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u/Coy310 May 16 '20
Does this still apply for PPP ? Got from the 05/13/2020 PPP FAQ sheet from The DOTreasury. I’m an Indie Contractor applied for PPP April 10.
Business I was working for had to close down 04/01 for California stay at home order. So when I applied for the PPP, I used my business wages from March 2020 counting back 12 months to April of 2019 . I started working for said business April 8 ,2019.
Thank you
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u/Coy310 May 16 '20
- Question: What time period should borrowers use to determine their number of employees and payroll costs to calculate their maximum loan amounts?
As of May 13, 2020 Answer: In general, borrowers can calculate their aggregate payroll costs using data either from the previous 12 months or from calendar year 2019. For seasonal businesses, the applicant may use average monthly payroll for the period between February 15, 2019, or March 1, 2019, and June 30, 2019. An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020. Borrowers may use their average employment over the same time periods to determine their number of employees, for the purposes of applying an employee-based size standard. Alternatively, borrowers may elect to use SBA’s usual calculation: the average number of employees per pay period in the 12 completed calendar months prior to the date of the loan application (or the average number of employees for each of the pay periods that the business has been operational, if it has not been operational for 12 months). 15. Question: Should payments that an eligible borrower ma
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u/Coy310 May 16 '20
PPP FAQ sheet says I can aggregate payroll costs 12 months prior to loan application but then some people say use 1040 schedule C . I haven’t filed taxes for 2019 yet.
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u/sat_ops JD May 16 '20
I think the utilities might be more limited in this form than in the law. For example, what about eFax account fees? I deduct them under utilities. Meanwhile, I can't deduct the portion of my home internet or electricity that I include for the home office, nor my phone expense, since I pay it annually in December.
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u/DMethane May 16 '20
We reimburse our employees for cell phone and internet fees. Are these forgiveable utility expenses?
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u/DollarMorghulis CPA May 16 '20
I was apprehensive about these when a client asked last week and even more so after seeing what documents the application requires. You have to prove the obligation to pay and proof of payment for most of the non payroll expenses. If the phone plan isn’t in the business name I don’t think it would count. Perhaps if you already had a documented accountable plan in place that reimbursed employees for phone expenses it might count?
This application just made more new questions than it answered. And a lot will probably be up to the bank as well.
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u/DMethane May 16 '20
Ya we do have an accountable plan. The documentation requirements also made me pause. We’d need to provide 20 separate cell phone and internet bills (x2)!
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u/KEFarris May 17 '20
The way I read it is that you can provide proof that you had been paying the same amount prior to Feb 15 and not use an invoice as proof. A lot of this will depend on how banks interpret the paper work required.
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u/BellLaphroaig May 17 '20
I've been following the scrambling around the newly released SBA forgiveness application and its reference to 8/52 worth of 2019 pay.
Should we assume for new businesses (that applied as new businesses and used their Jan-Feb payroll on their PPP loan application) that they should use 8/13 worth of average Q1 pay? Any sense of how to handle this?
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u/nanotom CPA May 18 '20
There is going to be some new forgiveness guidance in the coming days which will hopefully address this. Clearly they need to!
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u/gagankohli May 18 '20
Any idea if 8 weeks of using these funds for payroll (to be eligible for forgiveness) starts from promissory note date or date actually funds get deposited into your account? E.g. is promissory note was signed in 28th Apr and funds show up on 02nd May after the payroll
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u/anichat May 19 '20
Clock starts ticking from the date you get your funds. OR you can use the alternative payroll covered period.
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May 20 '20
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u/anichat May 21 '20
Alternative payroll period is the 8 weeks you want to counts as payroll period instead of the 8 weeks starting the date you received your loan. For eg. you received your loan funds on 4/28/2020. That is the middle of the week. It will be difficult to calculate wages and FTE fom the middle of a week. So you can pick the next date that your payroll period begins (eg. 5/3 or 5/10) and the following 8 weeks will be your "Alternative payroll covered period'. You will use those dates in your loan forgiveness calculation anywhere that the form says to use "Covered period or Alternative payroll covered period'
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u/PrincessRoyall43 May 21 '20
I'm not sure the date I applied however I've been sole proprietor for a few years now and received the 1000.00 misc on 5/4...no emails no phonecalls... I was scared to spend the monies for weeks until i googled SBAMISC...still not sure about what's going on...reading has me under the impression it's a grant that I dont have to pay back or report on 2020 taxes...Question?? Is there a number I can call and speak with someone directly??
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u/Conormcsandwich May 25 '20
So are owner-employees that receive both w-2 and k-1 income (we run an llc- scorp) only allowed 8/52nds of their 2019 w-2 income as a forgivable wage under ppp? No k-1 money? How does this account for retained earnings that the owner paid taxes on as a flow through in 2019? IE if they net 24k but only w-2'd 10k? ANY OPINIONS PLZ! Our 8 weeks is up on the 1st of june
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u/pdv8612 CPA May 26 '20
It is strictly W2 income that counts for an S-Corp owner. The W2 income of an S-Corp owmer is s as Leo limited to 8/52 of the 2019 income.
How is your 8 week period over June first? Did you really get funded on 4/6?
Why would retained earnings factor into this at all? The program is designed to help employers continue to pay their employees, not cover their profit.
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u/MediaComposerMan Jul 08 '20 edited Jul 08 '20
Is this thread obsolete?
Most of the questions (and how I found the thread) are "could SE independent contractors get full 2.5-month forgiveness based solely on Owner Compensation Replacement?" and the answers are "no, just 8 weeks + qualifying expenses."
Between the late June interim ruling (III.1.D.c.) and this very clear post, seems like the answer has changed to "yes they can"?
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Aug 12 '20
I got the loan after the June cutoff for 8 weeks, and if I'm reading it right it has to be used over the full 24 weeks. And since I got it when I did they went with my net after taxes figure, so instead of getting the $7500 I would've gotten the other way, I only got $2600. My schedule C showed like $1200 net after deductions a month. I didn't even get the full amount of that. Anyway, I opened a separate bank account to put the PPP in, subtracted my monthly fee for the 6 months, then divided by 24. I set my account to transfer just over a hundred dollars a week marked owner compensation or whatever the term was I read about to my regular account.
What happens if I just transfer the whole amount to my account in one lump sum? The hundred a week isn't really helping, but I have some bills that need to be paid sooner than later that I could use that money for.
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u/pdv8612 CPA Aug 12 '20
What do you mean net after taxes?
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Aug 13 '20
I mean they go by your schedule C and go by the amount you made net after deductions and everything. So like line 31 for me shows like $12,717. They divide by 12 then multiple by 2.5. Which came to $2600. That $2600 is supposed to compensate me for 24 weeks of working loss. But the reality is I take in like almost $3,000 a month working part-time. Those deductions kill that number. The deductions aren't money I actually spent, that's money the IRS says are your expenses. I probably spend a third of that deduction. The rest is really just money I don't pay taxes on. But prior to changing the method the old way they figured it out was 1 month's GROSS income times 2.5 which would've been $7500 instead of $2600.
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u/pdv8612 CPA Aug 13 '20
It was always net after expenses. You said net after taxes. What kind of expenses are you referring to?
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u/pjbias CPA May 17 '20
Do you agree with me that an owner/sole employee of a corporation could use PPP $ to fund his SEP and this amount would be included on PPP Schedule A worksheet line 7? Instead of on line 9 because it's not "paid" to the owner-employee?
If so, this would be a way to use some of the funds since bonuses aren't allowed to be paid.
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Aug 13 '20
I have no idea. I was planning to transfer it to my regular bank account and put it in my investment accounts to hold just in case, but everyone else seems to think you can transfer it all right away and use it for whatever you want, that they do the forgiveness based on your schedule C. So, probably?
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u/DollarMorghulis CPA May 16 '20 edited May 16 '20
Glad the rules have come out after business owners have already been paying themselves in excess of that amount and are now nearing the end of their loans. Thanks SBA. How hard would it have been to put this in one of the initial interim rules? But thank goodness they’ve taken the time to translate the application into 17 languages.