New Guidance on Payroll Protection Program (PPP) Loan Forgiveness

Click here to be taken to the Small Business Association's PPP Loan forgiveness page.

As you may have seen, the Small Business Administration (SBA) released new guidance on how Paycheck Protection Program (PPP) loan forgiveness will be determined. Please find a link to the SBA’s latest release:

You may be asking yourself: “What does this mean for me and my business?” Collective is here to help provide clarity to that question.

Example 1: Sole Proprietorship Turned S Corp

Last year I was a sole proprietor reported on Schedule C in my tax return. I applied for the loan based on my prorated Schedule C earnings. This year I’m an employee of my S Corp and pay myself a reasonable compensation on a W-2. How much do I pay myself in this twenty-four week period? What amount will be forgiven?

Susan earned $84,000 in net profits last year (2019) as a sole proprietor. When she applied for her PPP loan, it was based on self-employed earnings of $7,000 per month. This year (2020) Susan is employed by her S Corp and pays herself a monthly salary of $4,000 (before payroll taxes).

In this example, we believe the prudent route is to stick to the amounts you used to qualify for the loan. That means Susan would pay herself a monthly salary (before taxes) of $7,000 during the PPP forgiveness window. Susan may need to make an adjustment later in the year to smooth out the annual amount of reasonable compensation reported on her W-2.

Example 2: Business is Earning More than Expected

Despite the COVID-19 pandemic, my business is, fortunately, doing well and earning more than I did last year. Can I pay myself what I’m now earning now instead of the loan application amount? Will this amount be forgiven?

Jerome is employed by his S Corp and paid himself $60,000 in reasonable compensation last year (2019), which is $5,000 per month (before taxes). Due to a recently won contract, he’s planning on paying himself $72,000 this year (2020) via payroll.

In this example, we believe the safe route is to stick to the amounts you used to qualify for the loan. Jerome could use the loan to pay up to $5,000 of his monthly salary and that portion would be forgiven. But, if he used the loan to pay himself an additional $1,000 per month in salary ($6,000 total), any amount over $5,000 would likely need to be repaid.

Example 3: Business Owner is Considered “High Earner”

My business net earnings last year exceeded $100,000 and this was the amount I used to qualify for my PPP loan. I hear there’s now a cap on how much I can use to pay myself as an owner-employee, how does this work?

Terry’s restaurant business generated net earnings of $120,000 last year (2019). As the sole owner and employee, this amount was used to determine Terry’s compensation for the year, which is $10,000 per month.

Under the recent guidance, owner compensation that’s paid during the forgiveness window from PPP loans is capped at $8,333 per month. This represents an annualized amount of $100,000. Terry can pay themselves up to $8,333 per month from the PPP loan at some point over the twenty-four weeks and have it forgiven. Any additional compensation above this threshold paid out of their PPP loan would likely need to be repaid.

If you need documentation for your bank regarding amounts to apply for or amounts to be forgiven, please see the recently released forgiveness report issued by Gusto on your account. It pulls the figures you need to provide your bank.

If you have more questions about your PPP loan, reach out to your Collective advisor. We’re here to help!

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