On Friday evening, the day after our last webinar, Treasury issued 45 pages of guidance on PPP Loan Forgiveness.
The Good News
As we hoped, the FTE Reduction Exceptions also apply to the Wage Reduction Limitation. Employees who fail to return from unemployment, are fired for cause, quit, or request a reduction in hours will not count against you in either the FTE or the Wage Reduction Loan Forgiveness Limitation.
In order for the above exceptions to not count against you, there is a new requirement. You do have to report any employee who fails to return to work to your state unemployment office (California EDD) within 30 days after your offer to rehire is refused.
A second bit of good news is that our understanding of paid and incurred for nonpayroll costs has been confirmed. You may include all eligible costs paid during the 8-week covered period, regardless of when incurred. In addition, you may include all eligible costs incurred during the 8-week covered period, as long as the costs are paid by the next regular payment date. We still do not see any prohibition on prepaid rent or utilities. If Congress extends the 8-week covered period or overrules Treasury’s 75% payroll cost mandate, we may see some tightening in this area.
The Bad News
Calculating the potential loan forgiveness, the two limitations, the two exceptions, and the two safe harbors is just as complicated as we thought. Indeed, the new Wage Reduction Exception described above, while written in the most beneficial way possible, requires even more FTE calculations.
And, the Wage Reduction Limitation itself now has an even more complicated formula. Again, it’s business friendly, but it does require separating the wage reduction due to a pay rate change from the wage reduction that is due to an hours-worked change. Both still count against you, but only once.
Oh, What a Surprise. Not!
Treasury and the SBA continue to disfavor owner-employee compensation in the loan forgiveness calculation. (But keep reading to the end for a big positive change.)
First, last Friday’s guidance adds yet another limitation on owner-employee forgiveness. Forgiveness is limited to $15,385 per owner. This change is in direct conflict with the instructions to the loan forgiveness application. In any case, if you received a $100,000 salary from an S-corporation in which you have an ownership interest and you had $100,000 income on a Schedule C, you would have to split $15,385 between the two loan forgiveness applications.
There are four entity types that may generate owner-employee compensation: C-corporations, S-corporations, partnerships (and LLCs taxed as partnerships), and sole proprietorships (Schedule Cs). For all of these, an owner is limited to the lesser of 1) $15,385, 2) 8/52 times 2019 payroll or self-employment earnings, and 3) the amount paid during the 8-week covered period. (So, if you’re a partner or sole proprietor, don’t forget to take a draw. You can always put it back later.)
Non-cash compensation is not included for partners and sole proprietors. It is included for corporate owners, but unlike regular employees, it is subject to the $15,385 limit.
And while not new, there is a rule that partnership self-employment income is reduced by 7.65% before applying the $15,385 limit.
Some More Good News
Well, you’ve stuck with us this long. We think it’s time for some more good news.
Way back in Interim Final Rule 3 that was published on 4/14/2020, Treasury decided that sole proprietors’ self-employment earnings would not increase forgivable nonpayroll costs. In our last webinar, we showed how the loan forgiveness application does not limit nonpayroll costs in this manner for any owner compensation. There is nothing in last Friday’s guidance that contradicts the forms and instructions. So, $75 in forgivable owner-employee, partner, or sole proprietor compensation will increase the forgivable nonpayroll costs by $25.
We will keep you posted as soon as we get any more relevant guidance.
Dave focuses on tax compliance and planning in the areas of income and estate tax. He is the tax partner for our automotive group but he’s also tapped for his expertise in real estate, manufacturing and professional services. He’s a whiz at estate and gift taxation and can create a customized approach to designing and implementing a successful exit plan for business owners.
You can reach Dave at 714-672-0022.
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