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SBA Provides Self-Employed and Partners Guidance on PPP Loans

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PPP loan calculations for self-employeds and partnerships (04-27-20)

The SBA has finally issued guidelines on calculating monthly payroll costs for Paycheck Protection Program loans for all entities, including self-employed taxpayers and partnerships.

Self-employed individuals

Self-employed individuals with no employees determine their monthly payroll costs by dividing their Schedule C, line 31 net profit amount, up to a $100,000 maximum, by 12. If the line 31 net profit amount is zero, the individual is ineligible for a loan.

If the self-employed individual has employees, add the monthly employee payroll costs to the amount above. These payroll costs are based on the 2019 IRS Form 941 taxable Medicare wages and tips (line 5c, column 1), plus any excluded pre-tax employee contributions for health insurance or other fringe benefits, up to a $100,000 maximum per employee.

To this amount, add the following 2019 costs:

  • Employer contributions for employee health insurance (portion of Schedule C, line 14 attributable to health insurance);
  • Employer contributions to employee retirement plans (Schedule C, line 19); and
  • Employer state and local taxes assessed on employee compensation (UI, ETT, and SDI).

Partnerships

The application for partnerships should be completed at the partnership level. Individual partners may not apply for separate PPP loans.

The maximum loan amount is based on 2.5 times the 2019 monthly self-employment earnings reported to U.S.-based general partners on the 2019 Schedule K-1, Box 14a, net earnings from self-employment tax, with a maximum of $100,000 per partner. If the 2019 K-1s have not yet been completed, they must be completed for purposes of the loan application.

This amount must be reduced by any claimed IRC §179 expense, unreimbursed partnership expenses, and depletion on oil and gas properties. The result is then multiplied by 0.9235 (to remove the “employer” share of self-employment tax).

To this amount, add any 2019:

  • Monthly employee payroll costs based on the 2019 IRS Form 941 taxable Medicare wages and tips (line 5c, column 1), plus any excluded pre-tax employee contributions for health insurance or other fringe benefits, up to a $100,000 maximum per employee; 
  • Employer contributions for employee health insurance (portion of Form 1065, line 19, attributable to health insurance);
  • Employer contributions to retirement plans (Form 1065, line 18); and
  • Employer state and local taxes assessed on employee compensation (UI, ETT, and SDI).

LLCs

LLCs compute their payroll costs based on whether they are taxed as a sole proprietorship (SMLLC), partnership, or corporation.

Additional guidance

The guidance also specifies how nonprofit organizations and C and S corporations should calculate their maximum loan amounts, as well as the documentation each entity type must provide with its application.

The guidance is available at:

https://home.treasury.gov/system/files/136/How-to-Calculate-Loan-Amounts.pdf

California Appellate Court Rules Against FTB in Swart Case

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Swart case could be a small but notable victory for out-of-state ownership of a California LLC.

Currently, California’s franchise tax is imposed on the net income of every corporation “doing business within the limits of this state.” (§ 23151, subd. (a).) For tax years prior to January 1, 2011, section 23101 defined “doing business” as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” 2 (Former § 23101, now § 23101, subd. (a).) The term “actively” is the opposite of “passively” or “inactively” and means “active transaction for pecuniary gain or profit.” (Golden State Theatre & Realty Corp. v. Johnson (1943) 21 Cal.2d 493, 496 (Golden State Theatre); Hise v. McColgan (1944) 24 Cal.2d 147, 151.)

In this case, the $800 minimum franchise tax was imposed upon Swart several years after Swart made its investment and became a member of Cypress LLC. Swart argued that it was not doing business in California and that it passively held onto its investment in the tax year the franchise tax was imposed.

The Franchise Tax Board (FTB) demanded that Swart file a California corporate franchise tax return for the tax year ending June 30, 2010, and pay the $800 minimum franchise tax due on that return. Swart paid the tax, which amounted to $1,106 with penalties and interest, but contested it and requested a refund.

Swart claimed it was not subject to the franchise tax because it held no other investments in California, it did not otherwise do business in California, and it was only a passive member in Cypress LLC. Swart further claimed imposition of the franchise tax violated the due process clause and commerce clause of the United States Constitution. The FTB denied Swart’s request for refund.

Swart timely filed a complaint seeking a tax refund and declaratory relief. After briefing and argument on the parties’ cross-motions for summary judgment, the trial court entered an order granting Swart’s motion for summary judgment and denying the FTB’s motion for summary judgment. Swart was awarded a refund in the amount of $1,106.71.

 

Read court document here http://www.courts.ca.gov/opinions/documents/F070922.PDF

LLC vs S Corporation – What’s the difference?

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scorp llc door

Most every business start-up has come across the question “LLC or S corporation?”.

While this is a very common question, the response is often different depending on who you are talking to.

It should be noted that an LLC might work for some while an S corporation could be better for others – there is no “one size fits all” approach to entity selection.

In short, here are a few pro’s and con’s for the LLC and S Corporation entity structure:

 

LLC –

  • PRO – Divide profit as members see fit
  • CON – Passthrough income subject to self-employment tax if member has personal liability for debts of LLC or actively participates in trade or business of LLC

S Corporation –

  • PRO – Passthrough income is not subject to self-employment tax. Only employee-shareholder “reasonable compensation” subject to payroll taxes.
  • CON – Only issue single type of stock and must distribute profit based on percentage of stocked owned

Of course there are many more pro’s and con’s for each entity selection – feel free to call us with any questions and will be happy to discuss more (800) 425-0570.

For more related information visit the following links:

http://tiny.cc/xjz22x   IRS: Partners’ Share Of LLC Income Is Subject to Self-Employment Tax

http://tiny.cc/smz22x  5 Common Objections to Forming a Corporation or an LLC