Schedule C borrowers with no employees are not required to reduce their expense deductions to the extent the borrower applied all funds to payroll. This is true, even if these taxpayers do not have a 25% drop in gross receipts. Because the loans were issued to replace net Schedule C income from 2019, these taxpayers were not required to issue payroll checks to themselves for their loans to be forgiven and for loan amounts to be allocated to payroll.
Sch C borrowers with no employees who use borrowed funds to pay interest, rent, or utilities would be required to reduce expenses in an amount equal to those expenses.
***The first sentence makes no sense. Is there a typo? Should it read” Schedule C borrowers with employees …”
Does this imply that if no employees and the Sch C borrower used the funds for draws they don’t have to reduce expenses but it they spent the money on rent and did not pass the 25% test they have to reduce their rent expense?
Jonathon, your interpretation is correct. The owner compensation on which the PPP loan was based (2019 net income) is considered payroll costs under the PPP law/regulations. If they owner used it to pay rent, utilities, etc. rather than applied it as owner compensation and did not meet the 25% gross receipts reduction threshold then yes, they would have to reduce their rent/utility expenses.