Four Insights into the PPP Loan and Its Forgiveness

We receive many questions about the Payroll Protection
Program (PPP). Here are two of them with our answers.

1. Good Faith at the Time

Question. What are your thoughts on the repercussions
for business owners who acted in good faith based on the information available
at the time and are now left to do things that may be more questionable to earn
PPP loan forgiveness?

Answer. First, with good faith, there’s no fraud
issue as there is no fraud intent. Second, lenders and individuals had to
scramble for a good two months or more before guidance was clarified, so many
of the PPP loan application forms were murky (and some still are).

Obtaining the loan based on the guidance that existed at the
time of your loan application and approval is a non-issue. Further, during the
early process, lenders used (and in some cases, still use) their own formulas
to determine the loan amounts.

As to taking “questionable” actions to earn forgiveness, if
you follow the forgiveness applications, you are doing nothing questionable.

And that’s what you should do: follow the instructions in
the loan forgiveness applications. No funny business.

2. EIDL, EIDL Advance, and
PPP

Question. I’m seeing the Economic Injury Disaster
Loans (EIDL), EIDL advance, and the PPP. What are the differences?

Answer. We’ll deal with the big picture here. It will
prove helpful.

PPP. The PPP is the cash infusion program of choice.
The cash infusion part comes from a bank or other SBA lender and is based on
your prior payroll (2019 in most cases). It comes into your business as a
forgivable loan if you spend the money on defined payroll, interest, rent, and
utilities during a period of up to 24 weeks.

Example. You receive a $50,000 PPP loan and spend it within
the 24 weeks on defined payroll with no reduction in your employee head count.
You qualify for 100 percent forgiveness.

EIDL. Unlike the PPP loan, which comes from a bank or
other approved SBA lender, the EIDL is a loan directly from the SBA; it carries
a 3.75 percent interest rate, may require collateral, and must be repaid.

EIDL advance. The EIDL advance, when available, comes
into play with the EIDL application. It’s an advance on the EIDL of up to
$10,000. If you reject or don’t receive an EIDL and don’t have a PPP loan, the
EIDL becomes a non-taxable grant and does not have to be repaid.

If you have a forgivable PPP loan, you reduce the amount of
forgiveness by the amount of your EIDL advance.

Example. You have a forgivable PPP loan of $30,000
and an EIDL advance of $7,000. The lender will forgive $23,000 of your $30,000.
Let’s say you pay off the remaining $7,000. In this case, you have received a
net of $30,000 ($7,000 + $30,000 – $7,000).

If you would like to discuss your PPP, EIDL, or EIDL
advance, please call me on my direct line at 408-778-9651.

Does Renting My Home for Two Months Kill the $500,000 Exclusion?

Here’s how renting out your home while you take a two-month
vacation interacts with your ability to use the $500,000 home-sale exclusion
($250,000 if single).

Remember, you have to use the home as a home for two of the
five years before sale to qualify for the home-sale exclusion.

Exclusion Rule

The tax code allows you to exclude from gross income up to
$500,000 of gain (joint return, $250,000 if single) from the sale or exchange
of your home if

• during the five-year period ending on the date of the sale
  or exchange
• such property has been owned by you or your spouse for
  periods aggregating two years or more and
• used by both you and your spouse as your principal
  residence for periods aggregating two years or more.

Planning note. The ownership and use periods do not
have to be the same.

Vacation Rule

Here’s what the IRS said in an example that fits the vacation
activity:

Taxpayer E purchases a house on February 1, 1998, that he
uses as his principal residence. During 1998 and 1999, E leaves his residence for
a two-month summer vacation.

E sells the house on March 1, 2000.

Although, in the five-year period preceding the date of
sale, the total time E used his residence is less than two years (21 months),
the section 121 exclusion will apply to the gain from the sale of the residence
because, under paragraph (c)(2) of this section, the two-month vacations are
short temporary absences and are counted as periods of use in determining
whether E used the residence for the requisite period.

To summarize, E was living in the house for 21 months and on
vacation for four months, giving him a total of 25 months. To take advantage of
the $500,000 home-sale exclusion, E had to use the home for 24 months or more. The
IRS says he meets the 24-month rule because his vacation time counts as use of
the home as a home.

Rental

Your home is going to be a home under the vacation-home
rules when you use it as your home for a number of days that exceeds the
greater of

• 14 days, or
• 10 percent of the number of days during such year for
  which such unit is rented at a fair rental.

Example. You rent the home for 60 days and live in it
for 305 days. Your home is a home under the vacation-home rules because your
personal use is greater than 14 days and greater than six days (60 x 10
percent).

At the end of the year, you need to tally the rents you
received and allocate the home expenses to the rental based on the ratio of
rental days to personal days.

If you have a tax loss on the rental part, it’s not
deductible against other income, but all is not lost. The law allows you to
carry over any losses to the next tax year, when they again become available
against your home-rental activity.

If you have a situation or expect a situation that involves
the renting of your home while you are on a one- to two-month vacation and want
my insights, please call me on my direct line at 408-778-9651.

Five Answers to Spending the PPP Money on Your and Your Employees

If you report your business income and expenses on Schedule
C of your Form 1040, your PPP loan forgiveness is straightforward, as you see
in the four answers below.

1. Paying Myself

Question. I know that I can achieve full forgiveness based
solely on my 2019 Schedule C income in 10.8 weeks under the 24-week program. Do
I have to pay myself every week for 10.8 weeks?

Answer. No. Let’s say your PPP loan is for $20,000.
You could, for example, take $20,000 out of your business account in one lump
sum and put that in your personal savings anytime during the 10.8-week period
and then apply for forgiveness in week 11.

Because both your loan and forgiveness are based on your
2019 Schedule C net profit (yes, last year), you simply need to use the loan
money for personal purposes. This is how you pay yourself and obtain loan
forgiveness the easy way.

Sure, you need to use only 60 percent of the proceeds for
yourself and could use 40 percent for interest, rent, and utilities. But think
about it:

• Pay yourself only: simply paperwork.
• Pay interest, rent, and utilities: more rules and
  paperwork.

Keep it simple. Don’t make yourself suffer.

2. Waiting to Spend

Question. Can I wait a number of weeks before I spend
my loan proceeds?

Let’s say I receive the PPP proceeds on August 1, 2020. Can I
use the 24-week period and start on August 17, for 11 weeks? Would that be
okay? And would it be eligible for forgiveness?

Answer. Yes, no problem. But let’s be clear:

·
For PPP loans made on June 5 or later, the 24-week covered period
is the rule (there’s no “can” here—no eight-week possibility).

·
There’s no requirement that a Schedule C taxpayer spread out the
payments.

·
There’s no payroll or other impediment here.

3. Spending in Chunks

I am a Schedule C taxpayer with no employees. My PPP loan
amount was deposited into my business checking account on May 19, 2020. I am
not electing the eight-week covered period. Instead, I am choosing the 24-week
covered period, which ends on November 2, 2020.

I have two questions.

Question 1. Can I write one check for every four weeks
of payroll and deposit it in my personal checking account?

Answer 1. Yes—but this is not a payroll check. As a
Schedule C taxpayer with no employees, you have no payroll. Your PPP loan was
based on your 2019 net profit. And your forgiveness will be based on the same
amount. You don’t need to spread out your payments.

Question 2. Does this check have to be cashed within
that four-week period, or if it is written within that period, is that
sufficient to apply for forgiveness?

Answer 2. In general, your check is a payment on the
date it is written. Because you are dealing with yourself, you should ensure
that the check is cashed soon after it is written.

Also, we don’t see any wisdom (in fact, just the opposite)
in writing the check within the 24 weeks and then cashing it outside the 24
weeks.

4. Got the PPP Money but
Had a Loss in 2019

Question. I am a Schedule C filer, ran at a loss in
2019, but withdrew $120,000 from the business as the business increased its debt
position.

I used my draw amount to obtain a $120,000 PPP loan before
the guidance was issued on how sole proprietors should calculate their pay.

If the business now has two employees, can both of those
employees be used for the forgiveness application?

Answer. Yes, you can use the two employees on the
forgiveness application, and you can use 24 weeks of pay. In addition to
payroll, 40 percent of the forgiveness can come from interest, rent, and
utilities.

Example. Say the two-employee payroll for the 24
weeks totals $60,000 and the interest, rent, and utilities total $30,000. You would
achieve $90,000 of forgiveness.

If you would like my assistance with your forgiveness
application, don’t hesitate to call me on my direct line at 408-778-9651.