2020 Schedule C, self-employed how to report PPP received

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?

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). 

 

@nongkangma

And also, I paid owner compensation to myself. Wondering if this portion of income is passed through to my personal income? 

 

Thanks for  your explanation!

I already paid self-employment tax on this compensation paid from PPP fund. We should do that or not?

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.

 

@nongkangma

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.

 

@JeffreyR77  Thank you so much for your info. very helpful!

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).

 

Thank you

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.  

You are correct!  The only issue next, is to research how your particular STATE of operation is handling the PPP... for example: California is different than federal.  

So.., the compensation you paid to your self  (as a single owner LLC)  from PPP loan wouldn't be treated as 'income' and wouldn't be on Sch C.  Does this mean I can't use the 'compensation' to contribute to my self-employment 401K?   If the answer is yes you can, and say contributed max employee portion $26K (including catchup contribution), will I be able to contribute to 401K if I become W-2 employee later this year?  

@HelenC12 @LenaH @JeffreyR77 

 

A PPP loan forgiveness statement is required under RP 2021-48 per pg 23 of the instructions to the Form 1040. Will Turbotax update the 21 version to do this?

 

Forgiveness of Paycheck
Protection Program (PPP)
Loans
The forgiveness of a PPP Loan creates
tax-exempt income, so although you
don't need to report the income from the
forgiveness of your PPP Loan on Form
1040 or 1040-SR, you do need to report
certain information related to your PPP
Loan.
Rev. Proc. 2021-48, 2021-49 I.R.B.
835, permits taxpayers to treat tax-exempt income resulting from the forgiveness of a PPP Loan as received or accrued: (1) as, and to the extent that, eligible expenses are paid or incurred; (2)
when you apply for forgiveness of the
PPP Loan; or (3) when forgiveness of
the PPP Loan is granted. If you have
tax-exempt income resulting from the
forgiveness of a PPP Loan, attach a
statement to your return reporting each
taxable year for which you are applying
Rev. Proc. 2021-48, and which section
of Rev. Proc. 2021-48 you are applying—either section 3.01(1), (2), or (3).
Any statement should include the following information for each PPP Loan:
1. Your name, address, and ITIN or
SSN;
2. A statement that you are applying
or applied section 3.01(1), (2), or (3) of
Rev. Proc. 2021-48, and for what taxable year (2020 or 2021) as applicable;
3. The amount of tax-exempt income from forgiveness of the PPP Loan
that you are treating as received or accrued and for what taxable year (2020 or
2021); and
4. Whether forgiveness of the PPP
Loan has been granted as of the date you
file your return.
Write “RP2021-48” at the top of your
attached statement.

@iagt.  Yes, TurboTax for 2021 will produce the PPP forgiveness loan statement.  To enter the information regarding your PPP loan forgiveness, go to Wages & Income, then scroll down the page and find the Less Common Income section.  At the bottom of the Less Common Income section, select Miscellaneous Income.  On the next page, you will see an option for Forgiveness of PPP loans.  Select Forgiveness of PPP loans and respond to the questions when prompted.

 

Here is a picture of the top part of the Statement we produced in our test return.  

 

 

Thank you so much for the prompt and completely accurate response!!

Assuming one is filing a Schedule C for an individual sole proprietor business,

 

1. Shouldn't the EIN be listed, if one has, instead of the SSN # of the filer(s) as the PPP loan is associated with the business.

 

2. Shouldn't the text "Applying section 3.01(...) of Rev. Proc. 2021-49 ..." refer to Rev. Proc. 2021-

48

instead as Rev. Proc. 2021-49 is for partnerships.

Yes, if you have an EIN for your business, you need to include the EIN on the Schedule C and not the SSN.   

 

Yes, the language should be added.  

 

@iagt, @HelenC12 @LenaH @JeffreyR77 

 

A PPP loan forgiveness statement is required under RP 2021-48 per pg 23 of the instructions to the Form 1040.

 

Forgiveness of Paycheck  Protection Program (PPP) Loans
The forgiveness of a PPP Loan creates tax-exempt income, so although you don't need to report the income from the forgiveness of your PPP Loan on Form 1040 or 1040-SR, you do need to report certain information related to your PPP Loan.

Rev. Proc. 2021-48, 2021-49 I.R.B. 835, permits taxpayers to treat tax-exempt income resulting from the forgiveness of a PPP Loan as received or accrued: (1) as, and to the extent that, eligible expenses are paid or incurred; (2) when you apply for forgiveness of the PPP Loan; or (3) when forgiveness of the PPP Loan is granted. If you have tax-exempt income resulting from the forgiveness of a PPP Loan, attach a statement to your return reporting each taxable year for which you are applying Rev. Proc. 2021-48, and which section of Rev. Proc. 2021-48 you are applying—either section 3.01(1), (2), or (3).

 

Any statement should include the following information for each PPP Loan:

 

1. Your name, address, and ITIN or SSN;
2. A statement that you are applying or applied section 3.01(1), (2), or (3) of Rev. Proc. 2021-48, and for what taxable year (2020 or 2021) as applicable;
3. The amount of tax-exempt income from forgiveness of the PPP Loan that you are treating as received or accrued and for what taxable year (2020 or 2021); and
4. Whether forgiveness of the PPP Loan has been granted as of the date you file your return.

Write “RP2021-48” at the top of your attached statement.

 

 

What if there is a third PPP loan?  Both myself and my spouse recieved the loans but there is no option for a third loan?  And there doesn't seem to be any way to tie this to the actual businesses, instead showing up under personal.

 

 

There was never an option offered for a 3rd PPP loan.

 

A 3rd stimulus payment was issued in the spring of 2021 that you may be referring to.  This was paid to taxpayers and their dependents personally and was not related to businesses.

 

You can find more information about entering your stimulus payments at How do I claim the Recovery Rebate Credit in TurboTax?

I was unclear.  MFJ, two business owners are EACH eligible for 2 loans.  So for a single tax return, they would need to be able to enter the data for up to FOUR loans.

 

And there doesn't seem to be a way to show which company took which loans.  😮

For Schedule C filers the PPP loan is not reported separately. 

 

The receipt and forgiveness of the PPP loan is just a bookkeeping entry since the funds themselves are not taxable. 

 

The expenses you paid for with the funds are deductible on each of your Schedule C forms and are categorized as the type of expenses they are, for example, wages, payroll taxes, rent, etc.

I'm not sure we are communicating well.  I'm not discussing the taxation issues.  I am required to make a statement for each forgiven loan.  How can we do that if only space for 2 loans is provided?

 

M.

Can you clarify which TurboTax product you are using and which section is "requiring" you to make a statement about the forgiven loans?