PPP Change of Business Entity

[Kevin1]

New client operated in 2019 as a Schedule C sole proprietor, but set up a single person S-Corp in anticipation of operating as an S-Corp in 2020.   (He filed a zero income 2019 1120-S).   He has been operating under this new S-Corp in 2020.

He used his 2019 Schedule C income figures to qualify for the PPP Loan under the S-Corp EIN.   I'm a bit surprised the bank allowed this, but it is what it is.    Will using the Schedule C income figures for the 2019 look back on forgivable amount be allowed?   

To complicate things, he has only paid himself draws in 2020, although there is still time to do 3-4Q payrolls. 

[TaxGuyBill · Accepted solution]

I can't imagine why they would use Schedule C for the forgiveness.  He isn't a Sole Proprietor anymore; the business that took out the loan is a corporation, and the forgiveness should be based on that corporation.

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@Kevin1 wrote:

To complicate things, he has only paid himself draws in 2020,

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I'm rather opinionated about this, but I disagree with that statement.  Compensation is required, not optional.  So at least part of what he received is compensation, but he just neglected to withhold taxes and file payroll returns, which are now late and need to be filed.

[Kevin1]

I agree with your answer and want to make sure I wasn't missing something on the change in entity being allowed.    I can't see why SBA allow the 2019 C income as the reference for forgivable income - completely a different company.       

And I agree on the payroll / draw opinion.

[TaxGuyBill]

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@Kevin1 wrote:

I can't see why SBA allow the 2019 C income as the reference for forgivable income - completely a different company.       

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Offhand I don't remember the actual rules, but it makes sense to me.  The bank is using that as a reference for a loan.

If it is the same (or similar) business activity, the profit of the Schedule C is sort-of the equivalent of  wages for the corporation owner/shareholder/employee.  Yeah, it is going to be different, but it was only for a reference for a loan because there really wasn't anything else to reference. The actual forgiveness will depend on the actual situation and wages.

[qbteachmt]

If your client intends to apply for forgiveness, you need to inform them that the Draws are problematic and that No Payroll means No Forgiveness. Even "late" payroll will mean No Forgiveness, if you don't pay attention to the Date requirements. We don't know if this person is relying on the 8-week coverage period or the 24-coverage period. We don't know what timeframe they applied for. So, we don't know when their end date is or Was.

[Kevin1]

Yes, you are right - I did inform him right away, so we are running payroll to fix this.   It will still work on the 24 week schedule.

[Kevin1]

Confirmed that the bank wrote the loan for the S-Corp qualifying with Schedule C figures from 2019.    Not sure how that worked...   Will they do the same for the forgiveness part?   We'll see.   For now, I'll clean up the payroll.

Lookback provision in SBA docs for forgiveness:

"S Corporations: The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees."

https://www.sba.gov/sites/default/files/2020-08/PPP%20Loan%20Forgiveness%20FAQs%208-4-20-508.pdf

[TaxGuyBill]

Interesting.  I didn't remember or know that owner-employees of corporations also get to use similar rules as a Schedule C.

I know the SBA said they were going to issue some guidance for filers of Schedule C that were not operation in 2019, but I'm not sure if they have released that yet.  I would assume that similar guidance and rules will apply to the corporations.

[qbteachmt]

"I would assume that similar guidance and rules will apply to the corporations."

Rules? We don't need no stinkin' rules! Google this phrase:

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