PPP Loan Forgiveness Rules for S Corporations

COVID-19 Business Update

Owners of 5 percent or more of an S corporation who are also employees are eligible for Payroll Protection Plan (PPP) loan forgiveness of up to 20.83% of their employee cash compensation (capped at $20,833; maximum salary of $100,000 times 20.83%), with cash compensation defined as it is for all other employees (Box 1 on the W-2).

For these owner-employees, on top of the $20,833, the S corporation is also eligible for loan forgiveness for payments of state and local payroll taxes, and employer retirement contributions, capped at 20.83% of employer retirement contributions on behalf of the owner-employee.

The S corporation’s payment for health insurance is not eligible for additional forgiveness for S corporation employees who have a 2 percent or more stake in the business (including for employees who are family members of an owner of 2 percent or more of the business, under the family attribution rules of the tax code),5 because those contributions are included in cash compensation (Box 1 of the W-2).

Example. John, the sole owner and worker, operates his business as an S corporation. His 2019 W-2 shows $140,000 in Box 1 of his W-2, of which $20,000 is for health insurance. In addition, the S corporation pays state unemployment taxes of $500 on John’s income and contributes $20,000 to his pension plan.

Based on the facts in the example, the corporation is eligible for up to $25,000 of PPP loan forgiveness, as follows:

  • $20,833 on John’s salary (the cap), which the corporation pays to John at his regular rate in less than 10 weeks during the covered period;
  • $4,167 on John’s retirement ($20,000 x 20.83%); and zero on the unemployment taxes because they were paid out in January, before the covered period began.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.