PPP Tax Question

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Utetooth
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PPP Tax Question

Post by Utetooth »

My brother in law called me because he just got his PPP forgiven for his small business and so he is going to do a "mid-year bonus" for himself for about $70,000 and he wanted my advice on how to allocate those funds.

As I was writing up my suggestions on what to do with the $70,000 I have what I feel like is a dumb question that I could use your input on.

My question is, is that $70k taxable?

I know PPP forgiveness is not taxable on a Federal level and that his state has opted not to tax it but I presume that is at the business level. HIs small business is a C Corp (which I thought was weird) and so all of his "bonuses" in the past have been included as wages on his 1040 so I'm assuming that this $70K will be pre-tax for him on household/personal level. Is that right?

I have been researching this but I can't find a clear answer. If you have any input I'd be grateful.
"Be generally frugal and selectively extravagant" - White Coat Investor
bbqguru
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Re: PPP Tax Question

Post by bbqguru »

If he's a C Corp, it should be taxable just like any other wages or bonuses he pays himself.

We're a C Corp and everything was taxed as W-2 income, business as usual.
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MP123
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Re: PPP Tax Question

Post by MP123 »

The PPP forgiveness won't be taxable income to the C corp.

But any bonus he decides to pay himself on W2 will be taxable income to him personally, as usual.

They're really two different things.
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Utetooth
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Re: PPP Tax Question

Post by Utetooth »

So my BIL said he was in contact with a CPA who said there is a way to take the full $70,000 disbursement without paying taxes on it. According to this CPA the forgiven money is classified a "equity" in the business and therefore tax free.

This seems way to good to be true and I am skeptical. Have you heard of anything like this?
"Be generally frugal and selectively extravagant" - White Coat Investor
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MP123
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Re: PPP Tax Question

Post by MP123 »

Utetooth wrote: Tue Apr 13, 2021 11:14 am So my BIL said he was in contact with a CPA who said there is a way to take the full $70,000 disbursement without paying taxes on it. According to this CPA the forgiven money is classified a "equity" in the business and therefore tax free.

This seems way to good to be true and I am skeptical. Have you heard of anything like this?
I think that sounds like a pretty aggressive position to take considering the PPP terms require that it be used on payroll.

But there is substantial disagreement among professionals regarding PPP, and limited guidance from the IRS. If it was me, I would be much more comfortable running it though payroll and paying the FICA on it rather than treating it as equity.

This is a C-Corp, not an S-Corp, right? How does he intend to remove the equity from the corporation?
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Utetooth
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Re: PPP Tax Question

Post by Utetooth »

MP123 wrote: Tue Apr 13, 2021 12:11 pm
Utetooth wrote: Tue Apr 13, 2021 11:14 am So my BIL said he was in contact with a CPA who said there is a way to take the full $70,000 disbursement without paying taxes on it. According to this CPA the forgiven money is classified a "equity" in the business and therefore tax free.

This seems way to good to be true and I am skeptical. Have you heard of anything like this?
I think that sounds like a pretty aggressive position to take considering the PPP terms require that it be used on payroll.

But there is substantial disagreement among professionals regarding PPP, and limited guidance from the IRS. If it was me, I would be much more comfortable running it though payroll and paying the FICA on it rather than treating it as equity.

This is a C-Corp, not an S-Corp, right? How does he intend to remove the equity from the corporation?
Yes it is a C-Corp. He didn't mention how he intends to remove the equity, what would his options be? He just said he intends to take a "distribution".
"Be generally frugal and selectively extravagant" - White Coat Investor
Jackbnimble
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Re: PPP Tax Question

Post by Jackbnimble »

Maybe he should look at a dividend. It would not be deductible by the corporation, but a qualified dividend could be taxed at a lower rate (check with CPA before he does this). Also no payroll taxes would be due on a dividend.

If he wants to take this money out of the company he only has a few options and most, if not all, are going to be taxable to him.

Just my 2 cents.
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