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The Paycheck Protection Program (PPP) has helped countless businesses and self-employed individuals offset the economic impact of the COVID-19 pandemic, including keeping themselves on the payroll as owners. However, the vague rules of the loan at the start led to instances of bank lenders applying them incorrectly, and in some cases issuing loans based on a misunderstanding. There are businesses that received PPP loans based on owner compensation, but if the owner didn’t pay themselves payroll in 2019, the banks mistakenly took into consideration other forms of compensation such as 1099s and gross receipts.
You may have more difficulty than expected getting your PPP loan forgiven, which could leave you stuck with a debt that you previously thought you wouldn’t have.
No need to worry – The ALG Group is here to help you understand your options. This resource is intended to help you navigate PPP Loan forgiveness as it pertains to owner compensation, and give you a better idea of what your loan forgiveness might actually look like.
After you’ve reviewed the information here, our team of professionals can help you prepare your loan forgiveness application and strategize the appropriate next steps.
When Paycheck Protection Loans initially became available, the vague rules and accelerated application process resulted in cases where recipients now may be surprised by their loan forgiveness eligibility. It’s now clear that in some situations when bank lenders applied the rules of the PPP Loan to owner compensation, they based it on your salary up to $100,000. This allowed you to use that portion of the issued funds to give yourself a full paycheck, while you were under the impression that it would later be forgiven. Except that may not actually be the case! The treatment of owner compensation is dependent on how your business is structured and the 2019 income tax return filed. If these two factors were not taken into consideration during the PPP Loan application process, then it could mean that a portion of the loan you received isn’t eligible for forgiveness like you thought.
According to the Small Business Administration (SBA), the amount of owner compensation that is eligible for forgiveness depends on the business type and whether you used an 8-week or 24-week Covered Period. In addition to the specific caps that we’ll discuss below, the amount of loan forgiveness requested for owner-employees and self-employed individuals payroll compensation is capped at $20,833 per individual in total across all businesses in which you have an ownership stake. If you received a PPP Loan before June 5, 2020 and used an 8-week Covered Period, the cap is $15,385.
The SBA defines C or S Corporation owner-employees as owners who are also an employee, including where the owner is the only employee. If you fit this description, you are eligible for loan forgiveness:
For S Corporation employees with at least a 2% stake in the business (including employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C 318), employer health insurance contributions are not eligible for additional forgiveness because those contributions are included in cash compensation.
The Problem: Some owners did not pay themselves payroll in 2019 yet received PPP loans based on owner compensation. This is because their banks mistakenly took into account other forms of compensation such as Form 1099 and gross receipts. Based on the above definition of owner compensation for this business type, owner compensation paid in the covered period may not be eligible for forgiveness as you were expected to have paid yourself reasonable compensation as a business employee.
The SBA includes sole proprietors, self-employed individuals, and independent contractors in their definition of Self-Employed Schedule C or Schedule F Filers. If you fit this description, you are eligible for loan forgiveness:
Separate payments for health insurance, retirement or state or local taxes are not eligible for additional forgiveness. This is because these payments are taken out of your net self-employment income.
The Problem: Some self-employed individuals received PPP loans based on gross receipts and not net income as described above. The issue here is, like so many others during this time, you may not have filed your 2019 tax return prior to loan application. You’ve filed now, but the net income that you reported might not support loan forgiveness.
The compensation received by general partners is eligible for forgiveness up to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax. Separate payments for health insurance, retirement or state or local taxes does not count towards additional forgiveness.
The Problem: Much like self-employed individuals, general partners may not have filed their 2019 tax return by the time they applied for a PPP loan. This led to the bank still issuing the loan based on other forms of compensation. Now that you’ve filed for 2019, the net earnings described above that you reported may not qualify for forgiveness.
LLC Owners follow the guidance based on how your LLC is structured for federal taxes. This would be the same rules for C & S Corporation, Self-Employed Schedule C and F filer or General Partner.
The Problem: If your LLC is structured as a corporation and received a PPP loan despite having not paid yourself payroll in 2019, the owner compensation paid during the covered period may not be eligible for forgiveness, based on the definition of owner-employees for C & S Corporations described above. If your LLC follows a self-employed or partnership structure, the net income reported on your 2019 tax return that was likely filed after you received your PPP Loan may not support forgiveness.
If you have questions about your eligibility for PPP Loan Forgiveness, we're here to help you understand your options. Our team of professionals can help you prepare your loan forgiveness application and strategize the appropriate next steps. We can also help guide you on the best time to apply for forgiveness in relation to filing your taxes. Give us a call today!
