You can maximize PPP forgiveness by understanding the Small Business Administration’s Interim Final Rule on forgiveness. Further, by understanding the rule, you avoid bungles that destroy the forgiveness.
Fortunately, the rule details you need to understand? Straightforward in most cases. This blog post explains what you need to know.
And a quick note as we start. The Small Business Administration published the Interim Final Rule on PPP loan forgiveness late in the day May 22nd, 2020.
Note: If you’re not up to speed on the way the PPP loans work, refer our earlier blog post: PPP Loan Formula Explained. And if you’re a little foggy about how the forgiveness works, refer to our earlier blog post: Losing PPP Loan Forgiveness.
Tip #1: Use the Covered Period for Payroll Costs
A first tip to maximize PPP forgiveness? Probably you want to use the eight week covered period that starts when you get the PPP loan. Not the alternative covered period which starts the day the next payroll period starts. (You get to choose which eight weeks you look at.)
The reason? With the regular eight week covered period, you probably get to add more “extra bonus days” to the usual eight weeks, or 56 days, of payroll used for the forgiveness formula. And those “extra bonus days” can make a big difference.
But this gets weird. So, let me explain.
The payroll costs formula combines both payroll paid during the eight weeks and payroll incurred during the last payroll period of the eight weeks and paid the next regular payroll.
For example, say you run semi-monthly payroll, pay on the last day of the “half month,” and get your PPP loan on May 26th.
In this case, the covered period that starts on May 26th ends 56 days later on July 21st.
But the first payroll period in this eight week interval? It ends May 31st. And obviously it includes ten days of payroll before May 26th (from May 16th through May 25th).
Those extra ten days from May 16th through May 25th? They bump the usual 56 days of payroll to 66 days. And the days amount to your extra bonus days of payroll costs.
And now the actionable insight in all this…
Probably, you get more extra bonus days with a regular covered period than with an alternate covered period. Partly because you can use longer payroll periods. And partly because in order to get extra bonus days for an alternate covered period, you need to have the timing work.
If you pay payroll on the last day of the payroll period and you use the alternative covered period, for example, you don’t get any extra bonus days.
A Word about Alternative Covered Periods
By the way, if you use the alternate covered period, you start your eight weeks of “payroll cost tracking” the day the next payroll period starts. The payroll period also needs to be bi-weekly or shorter.
With the alternative covered period, you still count payroll paid and then also payroll incurred and paid with the next regular payroll. And you may still get extra bonus days. But the way the formula works? You may get fewer bonus days.
A final point. Do double-check that the regular eight week covered period lets you maximize forgiveness. In situations where your payroll fluctuates—perhaps you furloughed employees early in the Covid-19 pandemic—the alternate covered period may push more payroll costs into the forgiveness formula because it starts later when you may have more people working.
Tip #2: Time any 2019 Pension Contributions
Okay, an awkward trick the interim final rules allow. If you pay an employer retirement contribution during the eight weeks, that should count as payroll.
For example, if you make your 2019 SEP-IRA contribution during the eight weeks in 2020 that you’re measuring payroll costs, that should create payroll costs for non-owner-employees and also for owner-employees of S corporations and C corporations.
Between you and me? I would not rely on this gambit as a trick for inflating your payroll costs. But if you’ve done everything else in a right and righteous way and you have the option to make the 2019 employer pension fund contribution during the eight week covered period? Well, discuss this with your tax accountant. Let’s leave it at that…
Tip #3: Verify You Have Enough Owner Payroll
The loan forgiveness formula limits owner compensation replacement to 8/52nds of what the owner earned in 2019.
You can grumble about this tweak to the statute. But you also want to make sure, after you’re done with any grumbling, that you pay the owner at least the 8/52nds of her or his 2019 compensation. So, double check this. You want to be sure to pay enough during the eight weeks.
The precise formulas vary slightly depending on the type of business:
- Schedule C Sole Proprietors: 8/52nd of the Schedule C profit. For example, if the sole proprietor filed a Schedule C for 2019 that shows $52,000 of net profit, so $1,000 a week, the maximum owner payroll cost equals $8,000 for the eight weeks.
- Partners in Partnerships: 8/52nd of the 2019 net earnings from self-employment (so after things like any Section 179 expense deduction, unreimbursed partnership expenses, and oil and gas depletion, and then multiplied by .9235.)
- Owner-employees (so S corporation and C corporation shareholder-employees): 8/52nd of the owner-employee’s W-2 box 5. Note that for S corporation owner-employees, W-2 box 5 does not include health insurance. However, that fringe benefit (shown in W-2 box 14) should be included with non-owner-employee health insurance.
Four quick notes: First, the interim final rule—or least its current language—reduces a partner’s maximum owner compensation payroll for the employer half of self-employment taxes but not a Schedule C sole proprietor’s.
Second, a partner or proprietor gets no additional forgiveness for retirement or health insurance contributions since these amounts get “paid out of their self-employment income.” (That makes total sense.) Owner-employees do, by the way.
Third, an owner’s payroll costs can’t exceed $15,385. That number limits the owner’s payroll costs to not more 8/52nd of $100,000.
Fourth, owner-employees don’t count retirement or health insurance toward the $15,385 limit. (Neither, by the way, do non-owner-employees.)
Tip #4: Use the “Incurred and Paid Later” Gambit for Non-payroll-costs
A fourth tip…
The same bookkeeping approach you use for payroll can be used for non-payroll costs.
In other words, you count non-payroll-cost paid during the eight weeks. And you also count non-payroll-costs incurred during the eight weeks if paid at the next regular due date.
For example, say your eight week covered period runs from May 26th through July 21th. Let’s say, further, that cash flow troubles meant you could not pay your May rent on time.
But suppose after you got the PPP loan proceeds on May 27th, you paid the May rent (say that’s $5,000). And then on June 1st, you paid the June rent (another $5,000 say). And then on July 1st, you paid the July rent (yet another $5,000).
All three month’s rent should count. Because you made all three payments during the eight weeks.
Caution: Your non-payroll-costs forgiveness gets limited to 25%. For example, to receive forgiveness for $15,000 of non-payroll-costs, you need at least $45,000 of payroll costs. With $60,000 of total forgiveness (so $45,000 of payroll plus $15,000 of non-payroll), the non-payroll forgiveness equals 25%, which is the maximum.
Tip #5: Get Thorough About Your Utilities Costs
So the non-payroll-costs include rent for real and personal property if you entered into the rental or lease agreement before February 15th, 2020. And the costs include interest on business loans if you borrowed the money before the same “start” date. But these costs are pretty easy to spot.
The utilities costs however? That’s more of a grab bag. So be sure to include all the costs that the rules allow if you need more non-payroll-costs.
According to the interim final rule, utilities costs include “payments for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15th, 2020.”
The following items, therefore, can be counted if you need more non-payroll-costs to get full forgiveness: electric company, gas company, and water company bills (obviously), transportation costs (so gas and diesel fuel), telephone (so land lines and cell phones and also voice-over-Internet-protocol services) and then Internet access (so broadband cable Internet access and fiber optic Internet access.)
Two Final Quick Comments
If you’ve looked over the PPP loan forgiveness application or maybe read our Paycheck Protection Program Loan Forgiveness Application blog post, you already know that you need to be alert to the way that reductions in full-time-equivalent employee headcounts and salaries and pay rates impact forgiveness. So, obviously, pay attention to that. (Accountants pretty much all suffer from compulsive personalities. So I can’t help but issue this caution to you.)
And then one other thing to note here because we’re talking about the interim final rule on forgiveness. If you have employees who don’t want to come back to work or who you fired for cause, you want to read through the interim final rule for its guidance on those situations. If someone doesn’t want to come back to work, the updated rules say you need to alert your state’s unemployment office. Further, the new rules say you don’t have to bring back some employee you fired for cause. Just so you know.
I use an Accountables Plan as the owner of a Sub-S LLC, of which I am the sole employee. Under this plan I pay myself for my home office, which includes a percentage of our monthly rent, utilities, Internet, and cell phone bills. I generally pay this amount to myself twice yearly. Can I include this semi-annual payment under the forgiveables calculation? Would it be advisable to instead include 8/52 of the amount I paid in 2019 for this same purpose? It comes out to around $240 per month, so not a huge number, but every little bit helps. My LLC pays no other utilities, rent, or mortgage, so this should be my only non-payroll expenditure that might fall under the forgiveables rules.
I don’t think an accountable plan works for rent or utilities. The issue is the requirement to have the agreements entered into before February 15, 2020. Sorry.
Thanks for your posts. Best content I can find for small business owners!
If we I use my W-2 Box 1, which my health insurance premiums as compensation, do we still report health insurance premiums paid on PPP Schedule A, Line 6? If so isn’t that double counting it? Or do we only report the amount over $100k?
Also, can I make my SEP-IRA contribution for 2020 during the 8 week period and include that in payroll costs as well?
In blog post above, I said originally to count the owner-employee cash compensation as W-2 box 1 plus the elective deferral shown in box 12. But you’re right that this may create a problem if someone’s income goes over $100K. I’ve updated the blog post to say use W-2 box 5 (which will be everything BUT the self-employment health insurance) as the cash compensation… and then that means you include the owner-employee’s health insurance with the non-owner-employees.
The goal here, if you read the IFR the day I do, is to throw the owner-employee health insurance and retirement benefits into the same bucket as the non-owner-employee health insurance and retirement benefits…. do that and health insurance and retirement don’t get limited by the $100K, at least for employees.
Steve, thanks for the wonderful post. Super helpful.
I had a question about the S corp owners. Does the 15385 apply to salaries, health insurance and retirement or does it apply only to wage compensation.
I know you stated no in the above article, but I read Ed Zollars post and have a snippet of it below. Maybe I am misunderstanding. Can you please throw some light.
Owner-employees: Capped by the amount of their 2019 employee cash
compensation and employer retirement plan and health care contributions made on
their behalf. Note that the retirement contributions and health care contributions
http://www.currentfederaltaxdevelopments.com
are included in the total subject to the 8/52 cap and also appear to factor into the
$15,385 limit per individual.17
Sole proprietor/self-employed: Schedule C filers are capped by the amount of
their owner compensation replacement, calculated based on 2019 net profit. While
Appreciate your response.
Thanks
So, first, just an endorsement of Ed Zollar’s article. That’s a good read for anyone but especially tax practitioners.
Ed may be right. But here’s the block of text (from page 12 of the IFR) he’s using for his conclusion that the $15,385 limits both cash compensation and also retirement and health insurance,
He reads the language to say the $15,385 caps everything. And I can see how that’s a reasonable reading. (I should say I have a TON of respect for Ed. He may be right.)
But I’m reading that language to say the cash compensation or the payroll compensation gets limited to $15,385… but not the fringe benefits. And then there’s that clarifying bit about how you don’t add back retirement or health insurance for sole proprietors and partners because that “income” is already “inside” their Schedule C profits or net earnings from self-employment.
The language, to me, isn’t exactly clear. I will also say that I am influenced by a sense that an owner-employee and non-owner-employee to me would logically be treated the same.
First, I have found the information you have provided on your site to be a godsend to me as a small business owner. Thank-you for your insights and translation of government positions into usable information.
Two questions:
As an owner-operator running a 2 employee S-Corp (Owner and 1 employee) I am wondering any portion (maybe 8/52nds) of the standard home office tax deduction can be declared as rent for the business (no lease agreement exists between my S corp and me personally)?
Next, can software utilities qualify as “Utilities”. I am referring to recurring software license fees that are as essential as electricity and the internet for the operation of the business. Payroll software, bookkeeping software, milage tracking software, CRM licensing, etc.
Thanks again!
So, with regard to the home office, I think problem is you don’t have a lease or rental agreement in place on Feb 15, 2020, which is a requirement to get rent forgiveness. Sorry.
And then the software… I don’t think those count as utilities (based on the lists SBA has used in their guidance). But maybe you look at whether these count as rent of personal property? You’d need to renting or leasing property (like software or a cloud server?)… the agreement would need to be in force before Feb 15, 2020… for a lot of the expensive stuff you buy, that won’t work. But for a few items? Gosh, it just might.
I am owner-operator in a small insurance agency. I own the S-Corp, which employs myself and one other employee. The company historically runs payroll monthly, and so only 2 payroll dates fit into the 8 week window. Could the pay period be changed during the forgiveness period (permanent change of course) such that a 3rd payroll date could be pulled into the 8 week forgiveness period?
Sure. But are you sure you need to do this? You’ll get “forgiveness credit” for the two monthly payroll runs you do within the eight weeks. And then you’ll get credit for any other payroll costs incurred within the eight weeks and then paid in the next monthly payroll.
I used the example of someone who got PPP money on May 26 and does semi-monthly payroll in blog post. But what if this business did monthly payroll?
The 56 day covered period runs from May 26 to July 21, so the business counts the monthly payroll run that occurs on, say, June 1 for May. The business counts the monthly payroll run that occurs on, say, July 1 for June. And then the business counts 21 days of the monthly payroll that occurs on, say, August 1 for July “chunk” of eight weeks.
Again, the IFR says payroll counts if “paid” (so the two monthly payroll runs that occur within the eight weeks) and then if “incurred and paid at next regular payroll” (so part of the monthly payroll that follows the eight weeks.)
Note that the “extra bonus days” really add up fast if you use a longer payroll period. In above example, someone gets 82 days: 31 days for May, 30 days for June and 21 days for July.
I’m wondering about the alternate dates vs date starting on disbursement date. In our case, our alternates date would be 4/19 as opposed to 4/14. Our first payroll was paid on 4/23 which was for the hours worked from 4/5 – 4/18. Does the same “paid and accrued” rule apply if electing the alternate dates? If so, it seems I’d be better off with the alternate dates, since it would then include not only my 4/23 payroll; but also my June 18th payroll (covering through6/13) AND I could use the payroll costs incurred 6/14 – 6/18, but paid at the next payroll. This would effectively give me 75 days of payroll rather than 56 or 66. Or does opting for the alternate dates limit me to 56 working days regardless of when they are paid?
Yes, the same “paid” rule and the same “incurred and paid by next regular pay date” rule apply to the alternate covered period too. There’s another comment in the thread from David who points out the same thing. I think he and I end up with slightly different days counts, maybe, but I had not spotted the first read through the IFR the impact of a little lag in the payroll payment date on the alternate covered period.
So, bottom line, you are right. You might pick up days there.
BTW, a final related comment: I think what this really means is that you want to calculate the payroll both ways (using the regular covered period…and then using the alternate covered period.)
Good comment, Laura. Thanks for sharing.
Hi Stephen,
Thanks for the article. You’re a great resource here and on Twitter.
I have a question about this statement from tip #1 ” With the normal eight week covered period, you probably get to include more than eight weeks, or more than 56 days, of payroll in the forgiveness formula. The alternate covered period, in comparison, restricts you to just 56 days of payroll.”
I don’t understand why you say the alt period restricts you to 56 days?
Using the May 26th loan date example, but a bi-weekly pay period (so you can use the alt. period):
Pay period May 18 – May 31 – paid June 5
Pay period June 1 – June 14 – paid June 19
Pay period June 15 – June 28 – paid July 3
Pay period June 29 – July 12 – paid July 17
Pay period July 13 – July 26 – paid July 31
Standard 56 day Period May 26 – July 20; costs include 6/5, 6/19, 7/3, 7/17 pay dates (costs paid) + 7/13 – 7/20 costs paid 7/13 (costs incurred) = 56 days paid + 8 incurred = 64 total days.
Alt. 56 day Period June 1 – July 26: costs include 6/5, 6/19, 7/3, 7/17 pay dates (costs paid) + full 7/31 pay date (costs incurred) = 56 days paid + 14 incurred = 70 total days.
In this scenario, the alt. period gives you 6 more days of payroll costs and saves the time on pro-rating the final pay period. There are certainly scenarios that give the standard period more days, but my question is why you state the alt. period is restricted to 56 days?
Thanks,
David
Okay, first, I didn’t do a very good job of describing the weirdness about the extra bonus days. I’ve now updated that to make the discussion clearer.
But you’re right that a business gets extra bonus days with the alternate covered period. And I didn’t spot, when I wrote the original version of those paragraphs, what you helpfully point out: An alternate covered period situation can create a bunch of extra bonus days too–especially if there’s a lag between the end of the payroll period and the actual payment date. Also, the longer that lag, the more extra bonus days.
In response to your point, I tried to strengthen the language above about needing to look at the alternate covered period, too, if that’s an option.
Thanks for the comment, David. Good insight.
How confident are you that employer matching contributions for 2019 401-K program will be eligible payroll expenses for the PPP, provided it is paid within the covered 8-week period? I have a 20 person company and the match is a big number (over $50K). My typical payroll twice a month is about $80K. Typically I would make the match contribution in September, 2020 just before filing our 2019 Taxes (with extension). Has SBA ever published anything specifically that says this match is eligible? I have seen many articles saying it is eligible but nothing direct from SBA.
Pretty confident. The statute says retirement contributions count. And the IFR discussed in this blog say says that amounts you pay count.
The one area where people read the guidance differently (and especially the IFR talked about in this blog post) is owner-employee retirement contributions.
I read the IFR to say retirement contributions for owner-employees don’t count toward the $100K. Some other smart, highly respected accountants say they do count.
Quite honestly, I think everybody digging into the details wishes for more concrete and better written guidance.
Thanks, so much Steve – very helpful!
I’m a little confused by your Tip #4, last paragraph. It basically says that the maximum loan forgiveness formula is Non PR Costs / .25 = maximum possible forgiveness.
$15,000 / .25 = $60,000.
But I thought the formula was PR Costs / .75 = maximum possible forgiveness. In an example I read earlier (I think it was Nitti), the loan was $100k. They spent $95k, PR was $60k and Non PR was $35k. Even though they spent $95k, only $80k was forgiven – $60,000 / .75 = $80,000.
In your example, if you take $35,000 Non PR /.25 you get $140,000, which is over the amount of the loan. It seems that the larger the Non PR costs in your example, the more that is forgiven which doesn’t make sense to me.
I have a client who spent $132k on PR and $10k on Non PR. In your example, if you take $10,000 / .25 only $40,000 is maximum forgiveness, which isn’t fair. I would think they would get $132k/.75 = $176,000. (Since that is more than the loan, it is limited to the whole loan amount of $142k, which is forgiven.)
Any thoughts?
Good catch. You’re right Wendy. I’ve fixed the error. Thank you for contributing to the discussion!
Can I deduct my fuel cost in the 25% for my delivery trucks
Yes, I think that’s explicitly labeled a utility cost. Weird, right?
Hi Steve,
I have a PPP-related question, but it’s more about the application. I am the single-owner of a S-Corp with no employees (only 1099 contractors). I didn’t realize that I should have been paying myself a salary and have only been taking distributions to pay myself. As such, my company appears to be paying no wages and is therefore ineligible for a PPP loan.
I came across your post about last minute S-corp payroll hacks and wondered if I could recategorize my distributions as income in order to qualify for the PPP loan and avoid auditing issues down the line? Any guidance you can provide is welcome.
You situation is the same as Lauren’s… so I’d give you the same answer. (It’s someplace close to your comment.)
I can’t locate Lauren’s question or the response and I have a client with the same issue. I suggested he didn’t qualify. Someone else told him he did. What did I miss?
Ugh. Sorry. The question from Lauren and my answer appears in the thread on the PPP forgiveness application here:
https://evergreensmallbusiness.com/paycheck-protection-program-loan-forgiveness-application-tips-tricks-and-traps/
It’s the MAY 27, 2020 AT 3:04 PM comment from Lauren that starts with, “I’m interested in applying for a PPP loan, but was denied because I am the single-owner of a S-Corp with no employees (only 1099 contractors).”
I wanted to get clarification your comment
Owner-employees (so business owners operating as corporations and then employed by those corporations): 8/52nd of the sum of the owner-employee’s W-2 box 1 plus any elective deferral for a 401(k) or SIMPLE-IRA shown in box 12.
Box 12
I thought was employee portion of 401k so in my case 19.5k not employer pension portions
Does employee 401 k also count for forgiveness ?
OK, another reader comment above, sort of poking around at the some subject, made me realize we shouldn’t start with W-2 box 1. (The problem with that approach is, you may lose your health insurance “payroll cost.”)
So what I think you do is use W-2 box 5 which is your Medicare wages and which includes your elective deferral. And I’ve now updated the blog paragraph that talks about this.
Here an example of how this maybe works in your situation: Your 2019 W-2 box 5 shows $100K… but your W-2 box 1 shows $80,500. The difference is your $19,500 401(k) elective deferral.
So the target you want to hit? You want to be 8/52nds of that $100,000… or $15,385.
BTW, the way I read the IFR and the forgiveness application, the employer doesn’t count as cash compensation the employer match. Employer health insurance and retirement benefits get lumped together for owner-employees and non-owner-employees and thus none of that fringe benefit “income” gets subjected to the $100K limit.
Thanks for updating but as follow up box 5 for income then can you add 25 percent employer pension contribution to box 5 or do you have to use box 1 for employer pension portions
So here’s how I’m thinking about this.
Say you aren’t limited by the $100K because we’re talking about some owner employee making $70K who also gets $10K of self-employed health insurance. Let’s also say he or she contributes $20K to a 401(k) and that there’s a 5% 401(k) match.
Here’s how the W-2 looks:
Box 1 shows $60K, which is the $70K + $10K health insurance minus $20K elective deferral.
Box 3 and 5 show $70K as the amount subject to Social Security and Medicare taxes.
Box 12 shows the $20K elective deferral to the 401(k)
Box 14 shows $10K as the SE health insurance
I think owner compensation equals $70K (so box 5)…
I think the $10K of SE health insurance counts as health insurance.
In this situation, I think the 5% match might be 5% of $80K, or $4K. I think $80K is the number because person gets match on the $70k of wages and the $10K of health insurance.
BTW if this person made, say, $140k instead of $70K, the owner’s payroll cost gets limited to $100K. The health insurance, I think, does NOT get limited. But I could see the logic for limiting the retirement match to an amount that looks only at the $100K.
Hope that helps.
Steve,
Thanks for another insightful post on PPP. Two questions:
1. Our PPP loan originated just after paying payroll (originated April 17th and we pay semi-monthly). So are we just unlucky on timing and can’t squeeze an additional pay period in? 8 weeks takes us to June 12th at which point we will have incurred but not yet paid our 4th pay period.
2. Can we pre-pay any expenses so that it falls within the 8-week window? Such as paying for July rent before June 12th?
Hi Danny, so I think you are sort of unlucky in terms of question #1… but you guys should check and see if the alternate covered period works. I need another cup of coffee to do the math in my head, but I think you get a bunch of extra bonus days if you start with an alternative covered period that begins on May 1. (That alternate payroll period will run 56 days starting on May 1 but count the payroll checks you guys cut on May 3 or whatever for period that runs April 16 through April 30.)
With regard to the pre-pay idea, I don’t think you want to do that.
And this thing to watch. Yesterday the House passed PPP flexibilty Act which extends the window to 24 weeks. I bet this problem we’re talking about here goes away in a few days. Fingers crossed…
I have a PPP question regarding forgiveness. I have a client who is an LLC S corp with employees. At his time he currently has more FTE employees than originally on his PPP application and selected comparion period (1.5 additional). Will the additional employees that are paid during the 8 week payroll period be forgiven?
The additional employees’ payroll costs and creates forgivable spending. But those new employees don’t really make for additional forgiveness. The firm can’t go back and get a bigger PPP loan for example…
Question. Can the PPP be applied towards back payroll that was owed an employee before the funds were disbursed but after the april 8th date that we applied?
Yeah, it can. Check out the blog post about maximizing paycheck protection program forgiveness. But you’ll get essentially “extra bonus days” for costs you paid during the eight weeks even if the payroll incurred earlier.
I worked a total of 8 hrs and Is given 8 hrs of holiday, a total of 16. My employer added 34 hrs to my timecard and is requesting me to approve my timecard as if I worked a total of 8hrs per day. (When I didn’t) for the sake if the loan. This is a form of falsifying my timecard and it does not sit well with me. Can I deny to approve it?
Your employer is actually doing what Congress wants him or her to do… To summarize the PPP program, Congress gave money (free money, basically) to small businesses… and then told them to pay that money out to employees as payroll.
Hi Stephen – My husband and I co-own an S-Corp. No employees. We applied for PPP by dividing our 2019 gross wages by 12, then multiplied by 2.5. Our pay periods are all over the map. We basically pay ourselves when we’ve accumulated enough money to do so. For the forgiveness app, I think it would be optimal to choose the normal 8 week pay period vs. the alternate pay period? I’ll process one payroll for 8/52 of 2019 W-2 box 5? Pay period will start the day of receipt of proceeds until 8 weeks has passed? The paycheck date will be the last day of the 8 weeks? Wondering if I’m on the right track or not. Thanks for your thoughts!
You have it. That’s what you want to do. E.g., to illustrate and make the math easy, say one of you earned $52,000 in 2019 through an erratic bumpy payroll schedule. Hit and miss, hit and miss. But the W-2 shows $52,000 in box 5.
For the eight weeks that start with the loan, you can pay $1K a week. That’ll mean by end of the eight weeks, you’ve paid $8,000, which is 8/52nd of box 5.
Single man S-corp and 2019 payroll was only $12k gross (online mostly automated business, less than $40k income). 2019 SEP-IRA contribution was max $3k.
The business received $3125 in PPP due to the formula of average monthly amount which apparently includes the SEP-IRA amount ($15k/12 months = $1250 average monthly salary x 2.5 months = $3125 PPP). Unsure what all of this 8/52 talk is about 😬
Normally I just take a one time salary payment at the end of December. However, I know I must make some sort of payroll now within two more weeks in order to get this PPP amount of $3125 forgiven. My question is how do you recommend I do it? Should I pay 5/12 of the annual salary now since we just got thru May? If my business writes me a check, I also need traditional looking stubs I suppose so I can send to the lender in order to get this forgiven? Any advice? 🤞
You can pay 5/12ths now, inside the eight week covered period. But you’ll only get to include 8/52nd of your $12K as owner payroll. That’s a limit the SBA came up with.
So my one-time gross paycheck that is thru May 31 (5/12 of year) should be $6250?
15,000 * (5/12) = $6250. (Even though the 15,000 includes the SEP-IRA amount of $3k, the employer doesn’t need to make that contribution now though right; instead the employer can make the one-time $3k contribution later at the end of the year?
Or should I just have the gross paycheck exactly be $2307.xx which is the forgivable amount?
Stephen,
I thought I had this figured out but now I am confused.
Can I pay myself, the owner of the S-Corp, more than 8/52 of my 2019 salary?
I paid myself a salary of $60,000 in 2019.. I would like to pay myself the $15,384 during the covered period? Can I? Or is the most I can pay myself $9230.77 (8/52 of $60k)?
Similar question, can I pay my W-2 employees more than 8/52 of their 2019 wages?
Thanks in advance,
Tom
Stephen,
I’m confused, thought I had this straight.
As the owner of an S-Corp with 10 employees, myself being one of them, the S-Corp paid me salary/wages of $60,000 in 2019.
Did you say that the most I can pay myself in the Covered period is 8/52 of the $60,000 which would be $9230.77. I was planning on paying myself the $15385.
Can I?
sorry for the duplicate post Steve. I was apparantly having problems with my browser last night…..
As to question #1, I think I understand that since I paid myself 60,500 in 2019, as the owner of the S-corp, the most i can pay myself during the covered period is 8/52 of that or $9307..69
But, the bigger question I have is, can I pay an employee that made say, $30,000 in 2019, the maximum $15385? Or is that against the rules? My idea is to pay out as much of the loan as I can. I’ve searched everywhere and cannot find an answer to this….
Thanks again,
Tom
I am confused by this new legislation that got passed by Congress and will go to the president to sign .
Under the proposal, small businesses would have to spend 60% of the loan money on payroll instead of the previous 75%. They could use the funds for six months, a change from two months.
So does that mean you can pay your self and employees for 6 months worth of salary?
I am the owner of an LLC (no employees) and have only taken draws from the business as compensation. Primarily commission work and I used averaged monthly income from 2019. Approved for PPP loan . I understand I’m capped at $15,384 for compensation withdrawals. Can I claim home mortgage taxes at 1/10 of cost as I do annually on taxes? Same for all other approved non-payroll costs?
I think the challenge for a sole proprietor who wants to count non-payroll costs is in order to count rent you need to have the rental agreement in force by February 15, 2020. Same rule for a mortgage or loan–in force by February 15, 2020. The same rule shows up in the statute for utilities but the SBA rules say for utilities you need to have the service in place… so maybe utilities (phone, gas for your car, internet) work.
Sorry.
QUESTION: if self-employed Schedule C Cash filer with YTD net earnings showing a loss, does this mean the SBA or Bank will determine that I am not eligible for loan forgiveness because because it will see this as $0,00 payroll spent?
I have paid two monthly draws equating to the revised 60% requirement, one in May right after I received the funds, and one 30 days later. But I realize that for loan eligibility for Schedule C filers, they went by a formula using Net Earnings from previous tax return.. I received my PPP on this basis
But, my business nose dived to $0 in March and little more in April. I am therefore sustaining a loss YTD ever since. Even if lender/SBA would accept my isolating just the 8-10 week original period or the extended 24 week period, this would not help as the last 8 weeks have continued to be very low even though my business is open again.
So am I and all other business who have to close or whose sales came to a grinding halt because of the pandemic just out f lock on forgiveness since net earnings are not even going to be close to last year’s tax return (not even 5% of this due to the closure). I have no idea how long it will take to rebuild from scratch which is where I am at. I know I am not alone.
Does the bill or revised bull consider this? That I took the draws equaling 60%, does that even help? Has anyone from SBA even considered this in their guidance or in Congress?
It does not se equitable to me that my business received this loan to help me keep it going but then I am penalized and have no control whatsoever other than taking draws to meet the forgiveness requirement.
Second question, can you still pay 75% of amount received in payroll or will that now be limited to 60%? If so, will the 15% difference still count if if is payroll?
Thank you for your input that I anxiously await!
The PPP loan formula looks at 2019’s income. So a loss in 2020 shouldn’t matter. That loss in 2020, in fact, is sort of the point of you getting a loan.
Hello Steve,
Thank you so much for all your articles. You are truly a Godsend and wealth of information. We spoke on the phone earlier today and here are my questions you asked me to submit.
I am the owner of an S Corp with 30 employees. My 2019 payroll salary in boxes 1,3,5 is $31,530. We are a small employer and don’t pay any benefits as of 2019 and 2020.
Here’s where its tricky for me. The first half on 2019 I took a salary of $1500 and from September of 2019 through December; 6000 a month in salary. That has continued from January to present.
I received my PPP on May 5th and paid my first payroll on check-date of May 11th (paydays are 10th and 25th but 10th fell on a Sunday and the 25th fell on a holiday so paid May 26th).
Here are my questions:
1. How do I calculate my max pay for forgiveness? Is it 8/52 of the $31,530 or 15% of the $31,530 or is that all wrong? I just decided to take a $4000 salary on May 11th and I went back and had Paychex void my salary for May 26th. I also removed myself from the upcoming June 10 & 25th payroll. Is that the best way to avoid all this hassle? Or can I still take a salary?
2. If I understand everything you have written thus far, even though the funds were deposited on May 5th, I can start the 56 day clock on May 11th when the first actually check-date took place? I calculate that being July 5th.
3. If that date is correct then the payroll for July 10th (which will be paying the June 16-30 period would be covered under the forgiveness period?
4. Last question is am I understanding the forgiveness correctly in that if ALL the guidelines aren’t met; then the whole loan isn’t forgivable? Or would it be on the portions that were not followed on the guidelines wouldn’t be forgivable? Example is you get $100,000 and spend $75,000 on payroll and $25,000 on rent-its forgiven;
Example 2-$100,000 and spend $80,000 on payroll, $15,000 on rent and $5,000 on other business expenses- whole $100,000 is NOT forgiven
Is this correct understanding?
Many thanks!
So first, your personal payroll amount for the forgiveness calculation is 8/52nd of the $31,530. Or roughly $4,800.
Second, I think your 56 day “window” starts on May 5 and includes all of the May 11 payroll. Even though some of that payroll is for days that fall before May 5.
Third, the way I count your 8 weeks, the ending date is June 30. That’s 56 days after May 5 (26 days in May obviously… another 30 days in June.) And that means that the next payroll on July 10 (which pays for June 16 though Jun 30) counts too.
Fourth, no, the forgiveness rules aren’t as harsh as you worry… The rule is you get forgiveness for payroll, rent, utilities and interest but that payroll can’t be more than 60% of the amount forgiven. (That 60% is the new number from the PPP flexibility Act.) To use your numbers if you get a $100K loan and spend $60K on payroll and $40K in rent, utilities and interest, you get full forgiveness. However, if you spend $48K on payroll and $40K on rent, you only get $80K of forgiveness… Why? Because at $80K, that $48K of payroll meets the 60% threshold.
P.S. The new PPP flexibility act lets you look at a 24 week window rather than an 8 week window. You will have option to look at 8 weeks. But you can also look at 24 weeks.