Tax law definitions do not apply to much of the Payroll Protection Program (PPP), making it new ground for owners of S corporations. Here are answers to four questions of concern to many S corporation owners.
1. Spouse Owns S Corporation
Question. My wife owns 100 percent of the S corporation. She has a full-time job and does no work for the S corporation. I am the sole worker in the S corporation. Am I treated as
- a “non-owner employee” of the S corporation or
- an “owner-employee” subject to the limits?
Answer. The PPP guidance does not address the situation you describe. From what we know, you are a non-owner employee, which means you are not stuck with the owner-employee limits.
In tax law, you would have to consider “attribution rules” that would make you own what your wife owns because of your marital relationship. (Yes, in tax law you both would own 100 percent.)
But the PPP guidance to date contains no such rules.
According to the latest from the SBA, you may rely on the laws, rules, and guidance available at the time of your PPP loan application. As we write, the latest guidance is from over a month ago, on June 25, 2020.
2. S Corporation Owner-Employee with No W-2
Question. I submitted my PPP loan application before the guidance disallowing independent contractor payments was published. And at the time of submission, I had not yet started paying myself a salary.
Now I have the PPP money from the bank but cannot get it forgiven through contractor payments. If I pay myself on a W-2, I lack the look-back period of 2019 payroll.
Am I out of luck? Should I go on payroll and hope for the best?
Answer. Under the rules, you are out of luck. Your loan forgiveness is based on the lower of your 2019 W-2 (zero) or your 2020 W-2.
3. S Corporation Loan Based on K-1
Question. I operate my business as an S corporation with two W-2 employees other than me (I don’t receive a W-2). I applied for the PPP loan and obtained it based on my K-1.
A few weeks later the lender told me that the money I received was not available to be forgiven. It’s just not fair. My profit is my income.
Is there any workaround for this?
Answer. No—no workaround. But in your case, likely no PPP loan forgiveness problem either.
But first, let’s think about taxes. You operate as an S corporation, and you take no salary. (That’s incorrect and likely a tax problem if the IRS audits your tax return.)
Now, let’s get to the PPP. Your lender granted you the PPP loan based on the K-1 and ignored your employees. That shows how confusing the PPP has been. But let’s ignore the right and wrong of that and get to the heart of the issue. Can you obtain forgiveness?
Yes, your S corporation’s forgiveness begins with what you pay your W-2 employees during the 24-week covered period including what you pay in health insurance and retirement on their behalf.
In addition, you may include some or all of your payments for business interest, rent, and utilities during the 24 weeks beginning with receipt of the loan.
Example. Let’s say you received a $100,000 loan. If your payroll during the 24 weeks is $63,000 and the rent and utilities total $37,000, you would qualify for 100 percent forgiveness. If you achieve this in 20 weeks, you could apply for forgiveness then.
Observation. The fact that the lender based your loan on your profits is simply a mistake by the lender. It does not affect forgiveness, which is based on your using the money for the intended PPP purposes such as payroll.
4. S Corporation with Home Office
Question. Your tax guidance for the S corporation owner is for the owner to use an expense report to submit home-office expenses to the business for reimbursement and classify the reimbursement in the tax return as an office expense.
The idea behind this guidance is to avoid the rental fiasco.
How would we classify this as mortgage interest and utilities under the PPP loan forgiveness guidelines? We have the same question for partnerships where it is claimed as an unreimbursed partner expense.
Answer. The reimbursed expense won’t work for the PPP, but here’s the solution. Choose the 24-week program and you will achieve full forgiveness with only the payroll in as little as 10.8 weeks.
Source: Bradford Tax Institute