By: Todd Schanel, CFA, CPA, CFP®
on August 20, 2020

Paycheck Protection Program-Tax Advisor-AbacoaThe SBA has been releasing additional guidance regarding Paycheck Protection Program (PPP) loan forgiveness. Here are some highlights.

Health insurance for business owners

Health insurance expenditures for S-corporation shareholders (2% or more) will count toward regular compensation and will therefore count toward the $20,833 cap for owner’s compensation. Health insurance premiums for self-employed Schedule C or Schedule F filers and general partners will get this same treatment.

For all other employees, including C-corporation owners, health insurance payments are not considered to be part of compensation and can therefore be included as an additional forgivable expense above the wage and salary cap.

Retirement plan contributions

Retirement plan contributions paid by the employer are eligible for forgiveness above the wage and salary cap. However, the forgivable amounts cannot exceed 20.833% of the 2019 employer retirement contributions and cannot include any prepaid amounts for periods outside of the eight-week or 24-week covered period.

For self-employed Schedule C or Schedule F filers and general partners, retirement plan contributions are paid out of the individual’s compensation for self-employment and are therefore not eligible for additional forgiveness.

Applying for forgiveness prior to the end of the covered period

According to the PPP Flexibility Act passed in June, employers who received their PPP proceeds prior to June 5 may elect a 24-week covered period, and employers who received their loan on June 5th or later must use the 24-week covered period. But what if a borrower uses all the funds prior to the 24 week covered period ends?  Here is what we know as of now:

  • SBA guidance suggests that borrowers will be allowed to apply for forgiveness prior to the end of the covered period.
  • For the FTE test, the number of FTEs on the date of application – not the end of the covered period – will be compared to FTEs during the chosen comparison period to determine whether a reduction in FTEs has occurred. However, the SBA guidance does not clarify what happens if a company reduces FTEs after applying for forgiveness, but before the 24-week covered period is over. As of right now, the forgiveness application does not require a borrower to update their FTE and wage information after the application is submitted.
  • For wage and salary reductions of more than 25%, the date of application is again the relevant date for comparison. However, the FAQs state that borrowers must pro-rate the reduction in salary over the full 24- week covered period, even if they apply early.
Borrowers subject to forgiveness reductions may still qualify for full forgiveness

Currently, the loan forgiveness application is presented in such a way that would allow a borrower that is subject to a forgiveness reduction to still get full forgiveness. This is because the reductions are applied against actual expenditures, not the loan amount. For example, a borrower with a $200,000 loan and a 10% reduction in FTEs could get full forgiveness by including $222,000 in expenses in the application.  ($222,000 * 90% = $200,000).  This could however change with further guidance.

A tax loophole for the self-employed

Even though the CARES Act specifically states that the PPP proceeds are not taxable income, IRS guidance states that any expenses that result in forgiveness will not be deductible. This effectively makes the amount of loan forgiveness taxable.

However, PPP borrowers who are self-employed or are general partners in a partnership, the loan amount – and the forgiveness amount – is based in part on net self-employment income. Because self-employment income is not a deductible expense, there is no deduction to lose. This puts self-employed and partnership income at an advantage relative to S-corporation owner/employees.   There may however be future legislation that addresses this discrepancy.

Stay tuned for future developments.


Schanel & Associates is a CPA firm specializing in accounting, tax, business valuation and litigation support serving Palm Beach, Martin and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.
Todd Schanel has been a principal at Schanel & Associates since 2004, where he specializes in financial planning, tax planning and consulting services. He also serves as Founding Principal and Director of Investment Advisory Services at Core Wealth Management, our sister company, where he leads an accomplished professional team offering independent and objective financial advice to help clients achieve their financial goals. Todd has been a CFA Charterholder since 2005, and in 2007 he earned his Certified Financial Planner® designation and became a licensed CPA. In 2015, he earned the Certified Valuation Analyst (CVA) designation.