I received the first draw of PPP fund as a self-employed, and I paid compensation to myself from the PPP fund.
Even though the PPP fund itself is NOT taxable? Wondering how to report the compensation paid to myself from PPP fund?
You're correct. The PPP loan is not taxable however the expenses you pay with the PPP loan are deductible on your income tax return. For example: your compensation.
The PPP loan is a bookkeeping entry. When you received the money, from your PPP loan, it would be a Debit to Cash and a Credit to Loans (liability). As you pay yourself, you would Debit compensation and Credit Cash.
The compensation expense would be reported on your Schedule C (Form 1040) at tax time.
For additional information, see What is the Paycheck Protection Program (PPP) Loan?
**Mark the post that answers your question by clicking on "Mark as Best Answer"
As for compensation expense, which item I should put on Schedule C. say, which line?
It seems like NOT make sense to me if I don't report income instead only report as expense as a whole.
How does it work?
It depends. Direct labor would be a part of Cost of Goods Sold (Part III, Line 38). Direct labor is considered compensation to employees that directly relate to earning the income. Wages that are indirectly related (such as office employees), would be on Line 26 of your Schedule C.
PPP is not considered income and would be entered anywhere on your Income Statement. Rather, it is a balance sheet item. If it has not been forgiven as of December 31, 2020, it usually sits in a Loan account. Then, once forgiven, it would be a debit to the PPP loan account and a credit to a non-taxable income account in your accounting software (if you utilize one).
Some more clarification is needed to answer your question correctly - Did you take distributions of profits or issue yourself a W-2?
If it is a W-2, then you report it under wages on your 1040 and deduct it on your Schedule C, Line 26.
If it is a distribution, then that is also a balance sheet item and would not be reported on a Schedule C. You are being taxed on your net profit on your Schedule C.
Thanks for your explanation, for owner compensation replacement, it's not a W2.
So, it is also a balance sheet item? and does NOT have to be shown anywhere on Schedule C ?
I appreciate your help!
PPP loans themselves were not taxable income to businesses. Congress subsequently made the loans forgiven without tax consequence if the funds were used for the specified uses agreed to upon issue. Businesses were able to use PPP funds for expenses like payroll, rent, mortgages, business operating expenses, etc.
A Schedule C self-employed person does not receive compensation or payroll or wages from the Schedule C activity. You can withdraw funds anytime you wish, it's your business - your withdrawals are neither taxable events nor business expenses.
Your taxable income at years end is the bottom line. The PPP funds were intended to be nontaxable funds to the business to be used for specified business expenses. It would show on the balance sheet. It would not appear anywhere on Schedule C. The expenses that were paid for using PPP funds appear on Schedule C along with all other ordinary and necessary expenses.
So to be clear- Do I enter the forgiven PPP loan amount as general revenue since I am a sole proprietor and net income from the business is my income? I am unsure what line (if any) to enter my PPP funds (forgiven) since they were 100% for my income (I don't have employees so no payroll).
Ok ... for a Sch C sole prop the PPP is NOT INCOME and it is NOT AN EXPENSE so it will NOT be reported on the Sch C or anywhere else on the personal tax return. You still get to deduct all the expenses you paid EVEN if you used the PPP money to pay them.