Level 3

PPP Change of Business Entity

Forum|Forum|5 years ago
September 13, 2020
2 replies
16 views

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.

PPP Loan Forgiveness forms

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TaxGuyBill

Level 15

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.

@Kevin1 wrote:
To complicate things, he has only paid himself draws in 2020,

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.

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Kevin1Author

Level 3

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.

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TaxGuyBill

Level 15

@Kevin1 wrote:
I can't see why SBA allow the 2019 C income as the reference for forgivable income - completely a different company.

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

Level 15

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.

Don't yell at us; we're volunteers

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Kevin1Author

Level 3

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.

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