Further Guidance Issued On Tax Treatment Of Ppp Loan Forgiveness

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• New Loan Calculation Formula
• Search Form
• With Employees
• Further Guidance Issued On Tax Treatment Of Ppp Loan Forgiveness
• Schedule C Sole Proprietor? Heres How To Calculate Income For Ppp Loans
• Ppp Loans For Schedule C Filers

The remaining funds available for new applications are $8 billion set aside for community financial institutions and a $6 billion set aside for PPP applications still in review status or needing more information due to error codes. The SBA reported on May 2, 2021 that it had approved about $258 billion from the program’s reopening on January 11 through May 2. Recall also that the maximum loan amount for second-draw loans is $2 million, instead of the $10 for first-draw loans. IRS Form 1099-MISC detailing nonemployee compensation received , invoice, bank statement, or book of record that establishes you are self-employed. You do have the choice to use either Net Profit or Gross Income for your loan amount calculation. Unfortunately, if your PPP loan has already been approved as of the effective date , you cannot increase the PPP loan amount based on the calculation methodology. For a detailed understanding of the calculation, please refer to page 10 of the IFR.On January 8, 2021, the SBA announced that to promote access for smaller lenders and their customers, the SBA will initially only accept Second Draw PPP Loan applications from community financial institutions starting on January 13, 2021. On January 13, 2021, the SBA announced that it would open its portal to PPP-eligible lenders with $1 billion or less in assets for Second Draw PPP Loan applications on Friday, January 15, 2021 and the portal will fully open on January 19, 2021 to all participating PPP lenders to submit Second Draw PPP Loan applications.

The review will assess whether these borrowers complied with the PPP eligibility criteria, including the good faith loan necessity certification. Previously, PPP rules defined payroll costs for individuals who file Form 1040 Schedule C as net earnings from self-employment. Many Schedule C filers without employees had net profits less than $100,000 and were ineligible to receive the maximum PPP amount, and those with $0 net earnings were ineligible to receive a PPP loan. On March 3, 2021, SBA posted Interim Final Rule “Revisions to Loan Amount Calculation and Eligibility” allowing Schedule C filers to use the gross income to calculate PPP loan amounts. Using an applicant’s gross income may provide them with a larger PPP loan than the previously allowed use of net income since many applicants reflected nominal or no income.

New Loan Calculation Formula

For the business owner ready to implement key strategies and concepts with the right guidance and support. Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that the borrower desires to refinance. Add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020 and April 3, 2020 that the borrower seeks to refinance. The FAQs and other guidance issued by the SBA or by the SBA in consultation with the Department of Treasury with respect to First Draw PPP Loans apply to Second Draw PPP Loans, except as otherwise provided in the Second Draw Rules. The SBA may provide further guidance, if needed, through SBA notices and a programs guide, which are to be posted on the SBA and the Department of Treasury’s websites. Is the Applicant or any owner of the Applicant an owner of any other business, or have common management with any other business?Limited liability company members are subject to the rules based on their LLC’s tax filing status in the reference year used to determine their loan amount. Each applicant applying for a PPP loan must certify in good faith “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations” of the applicant.The borrower must provide a 2020 invoice, bank statement, or book of record to establish that it was in operation on or around February 15, 2020. The interim final rule, titled “Business Loan Program Temporary Changes; Paycheck Protection Program — Revisions to Loan Amount Calculation and Eligibility,” revises the maximum loan calculations for sole proprietors who file Schedule C returns, but the change is not retroactive. The SBA and Treasury have ruled that borrowers whose PPP loans already have been approved cannot increase their loan amount based on the new methodology. The Small Business Administration recently released a revision to rules implemented under the Economic Aid Act applicable to sole proprietors and independent contractors who file Form 1040 Schedule C. The revision redefines what constitutes payroll costs — the basis for PPP loan sizing — for these individuals.

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Prior guidance has included a safe harbor providing that any PPP borrower, together with its affiliates, that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. Until the passage of the December 27th Economic Aid Act, PPP rules permitted borrowers to receive a loan based upon 20.833% of their net income amount as indicated on Line 31 of their 2019 Schedule C tax return. It was not necessary to have the return filed with the IRS as long as a draft good-faith Schedule C had been completed. Borrowers that received loans of $150,000 or less that use SBA Form 3508S must submit the certification and information required by Section 7A of the Small Business Act and, for a Second Draw PPP Loan and revenue reduction submit documentation if such documentation was not provided at the time of application. 2019 or 2020 employer contributions to employee group health, life, disability, vision, and dental insurance ; retirement contributions ; and state and local taxes assessed on employee compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act from state quarterly wage reporting forms). Previously, the PPP rules defined payroll costs for individuals who file an IRS Form 1040, Schedule C as payroll costs plus net profits, which is net earnings from self-employment.Having the latest information available is key to staying compliant and taking advantage of potential opportunities. For additional information regarding the PPP and other economic stimulus programs. You must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan.

Can I buy a car with my PPP loan?

No, payments on credit card balances, merchant loans, or other forms of debt are not allowed PPP expenses. The interest on business mortgage payments is allowed. Acceptable examples of a business mortgage include: … Auto loan interest on a car you own to make business deliveries.No representation or warranty is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. If you use 2020 to calculate your loan amount, this is all required even if you have not yet filed your 2020 tax return; you must provide a 2020 invoice, bank statement, or book of record showing that you were in operation “on or around” Feb. 15, 2020. The calculation change is detailed in a 32-page interim final rule published late Wednesday afternoon by the SBA, which administers the PPP in partnership with Treasury. The SBA also released an updated set of frequently asked questions and six updated or new application forms, as follows.

With Employees

For self-employed borrowers that file IRS Form 1040, Schedule F and have no employees, gross income may be used instead of net profit. The IFR eliminates this restriction to the extent it applies to federal student loans. This change applies to new PPP applicants as well as those borrowers who have already received a PPP loan.

• The borrower must supply its 2019 or IRS Form 1040, Schedule C; Form 941 ; and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020, or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable.
• Schedule C or F filers are capped by the prorated amount of their owner compensation replacement or proprietor expenses .
• However, many Schedule C filers had already submitted their PPP loan applications by the time the gross income option became available.
• We look forward to a complete recovery and once again working directly with our clients.
• As recovery operations begin to take shape and progress, please do not hesitate to call on us to assist in your financial, tax, and other needs.
• For additional information regarding the PPP and other economic stimulus programs.

If yes, list all such businesses and describe the relationship on a separate sheet identified as addendum A. It has used, or will use, the full amount of the First Draw PPP Loan on authorized uses under the PPP rules on or before the expected date on which the Second Draw PPP Loan is disbursed to the borrower. If you received an Economic Injury Disaster Loan between Jan. 31, 2020, and April 3, 2020, add any outstanding amount that you seek to refinance; do not include amounts of any COVID-19-related EIDL Advances. AICPA leaders will discuss the SBA guidance, new forms and FAQs during an online Town Hall that will start at 3 p.m. We have learned through our experience with past disasters and the ongoing pandemic to be adaptive to new technologies and have implemented cloud-based applications that allow us to efficiently operate remotely.

Further Guidance Issued On Tax Treatment Of Ppp Loan Forgiveness

This includes individuals or married couples who have one or more limited liability companies that are solely owned by the individual or married couple and thus disregarded for income tax purposes. The borrower must supply its 2019 or IRS Form 1040, Schedule C; Form 941 ; and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020, or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish that the borrower was in operation on February 15, 2020. Great news for sole proprietors, independent contractors and self-employed individuals who file IRS Form 1040, Schedule C for their business operations. On March 3, 2021, the Small Business Administration issued a new Interim Final Rule relating to the Paycheck Protection Program that now allows these borrowers to use either Gross Income or Net Profit as reported on Schedule C to maximize the loan amount. Unfortunately, sole proprietors and independent contractors who have already received a PPP loan before March 3rd, 2021 cannot amend the loan application to make up for the difference, but if the sole proprietor or independent contractor had a 25% reduction in revenue for any quarter of 2020 as compared to the same quarter in 2019, they can receive a Second Draw PPP Loan as described above.Either amount must be prorated according to the chosen covered period; for example, for a borrower with an eight-week covered period, owner compensation would be capped at the lesser of eight weeks’ worth (8/52) of 2019 or 2020 compensation or $15,385 per individual, in total across all businesses. PPP rules had previously defined payroll costs for Schedule C filers as net profits – or net earnings from self-employment – plus any employee payroll costs, for those with employees. SBA and the Treasury recently released an Interim Final Rule with special guidance for filers of Form 1040, Schedule C – sole proprietors, independent contractors, and self-employed individuals – on how to calculate that second amount. If using gross income, the borrower will subtract expenses on lines 14 , 19 (pension and profit-sharing plans), and 26 from Form 1040 Schedule C. The borrower will use the lesser of the calculated amount or $100,000 as owner compensation. The new rule provides Schedule C filers with an option to use either net or gross Schedule C income for determining the owner compensation portion of their loan amount. In an Interim Final Rule announcement on Wednesday, March 3, 2021, the SBA issued new rules which provided a number of important changes for independent contractors and sole proprietors, which are discussed below.

To determine the amount of net profit or gross income allocated for the covered period, borrowers must use the same 2019 or 2020 Schedule C that was provided with their loan application. To reduce barriers to accessing PPP funding, the revised SBA guidance changes the calculation for sole proprietors and independent contractors by allowing them to use gross income as the basis to size their loan. Along with its new guidance, the SBA also released new PPP loan application forms, including an updated First and Second Draw borrower application form for Schedule C filers. Since the safe harbor is reduced only if the borrower elects to use gross income to calculate the loan amount, any borrower with net income exceeding $100,000 should use net income to calculate their First Draw PPP loan amount. Since the maximum loan amount is limited to $20,833 the loan amount would be the same, but the borrower would have the ability to rely on the $2,000,000 safe harbor that applies to the necessity of the loan. For all loans, the 2019 or 2020 IRS Form 1040, Schedule C or F that the borrower provided at the time of the PPP loan application must be used to determine the amount of net profit or proprietor expenses allocated to the owner for the covered period.

Who Can Use The New Formula?

The rule provides that if a borrower elects to use gross income to calculate the amount of its first draw loan and has more than $150,000 in gross income on line 7 of the Schedule C, the borrower will not be eligible for the loan necessity “safe harbor” provided to many other borrowers. The SBA explains that the purpose of this rule is to mitigate the risk of fraud otherwise potentially increased by the use of gross income. SBA states that it is not applying the safe harbor exclusion to second draw loans because those applicants are required to certify that they have realized a reduction in gross receipts in excess of 25 percent from the relevant comparison period. He use of gross income by Schedule C filers may, in some cases, increase the risk of waste, fraud, or abuse, because it will substantially increase the maximum loan amount for relevant applicants, and in some cases an applicant’s gross income may not accurately reflect the extent to which a PPP loan is necessary to support the ongoing operations of the applicant’s business. SBA is eliminating the loan necessity safe harbor for these borrowers as they may be more likely to have other available sources of liquidity to support their business’s operations than Schedule C filers with lower levels of gross income. SBA will review a sample of the population of First Draw PPP Loans made to Schedule C filers using the gross income calculation if the gross income on the Schedule C used to calculated the borrower’s loan amount exceeds the threshold of $150,000. (This safe harbor elimination does not apply to second-draw applicants, who are required to certify a 25% reduction in gross receipts.) “SBA is eliminating the loan necessity safe harbor for these borrowers as they may be more likely to have other available sources of liquidity to support their business’s operations than Schedule C filers with lower levels of gross income,” the IFR states.Be the first to know when the JofA publishes breaking news about tax, financial reporting, auditing, or other topics. AICPA experts discuss the latest on the PPP and other small business aid programs during a virtual town hall held every other week, including March 4 at 3 p.m. The webcasts, which provide CPE credit, are free to AICPA members and $39.99 for nonmembers. If you are an owner with no employees, your PPP loan would be equal to Gross Income on Schedule C, Line 7 divided by 12 and multiplied by 2.5.

Schedule C Sole Proprietor? Heres How To Calculate Income For Ppp Loans

Second-draw borrowers may not be subject to an economic necessity review since they will be required to demonstrate a 25% reduction in gross receipts to qualify. The guidance explains the new phrase, “proprietor expenses,” as describing the owner’s business expenses and owner compensation, not including employee payroll costs. All other borrowers must submit the certification required by Section 7A of the Small Business Act, and IRS Form 941 and state quarterly business and individual employee wage reporting and unemployment insurance tax forms or equivalent payroll processor records that best correspond to the covered period . For example, for borrowers that elect to use an eight-week covered period, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at eight weeks’ worth (8/52) of 2019 or 2020 compensation (i.e., approximately 15.38 percent of 2019 or 2020 compensation) or $15,385 per individual, whichever is less, in total across all businesses. To avoid double counting, the expenses reported on lines 14, 19, and 26 of IRS Form 1040, Schedule C must be subtracted from the owner compensation share of payroll costs if the owner uses gross income to calculate its loan amount. The borrower must provide the 2019 or IRS Form 1040, Schedule C with the borrower’s PPP loan application to substantiate the applied-for PPP loan amount and the appropriate 2019 or 2020 IRS Form 1099-MISC detailing nonemployee compensation received , invoice, bank statement, or book of record that establishes that the borrower is self-employed. If using 2020 to calculate the loan amount, this is required regardless of whether the borrower has filed a 2020 tax return with the IRS.The new Interim Final Rule also addresses the question as to whether a loan can be taken by a sole proprietor or an independent contractor who has significant income, given that the PPP rules prevent loans made to borrowers where the advancement is not “necessary to maintain the ongoing operations of the business.” To read more about the necessity requirement, click HERE. For self-employed individuals, including Schedule C or F filers and general partners, retirement and health, life, disability, vision, or dental insurance contributions are included in their net self-employment income. If the borrower has employees and uses gross income, the employee payroll costs for employees whose principal place of residence is in the United States. From the borrower’s 2019 or 2020 IRS Form 1040, Schedule C, the borrower may elect to use either the borrower’s line 31 net profit amount or the borrower’s line 7 gross income amount. (If the borrower is using 2020 to calculate payroll costs and has not yet filed a 2020 return, the borrower should fill it out and compute the value.) If this amount is over $100,000, reduce it to $100,000. If both the net profit and gross income are zero or less, the borrower is not eligible for a PPP loan. PPP applicants have long been required to make a good-faith certification “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing obligations.” SBA created a safe harbor that automatically deemed this certification to have been made in good faith for borrowers that received an original principal amount of less than $2 million.