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.