Client Alert: SBA Issues Additional Guidance for Self-Employed Individuals and PPP Borrowers Taxed as Partnerships
[Updated 4/23/2020: A prior version of this article included an interpretation of the SBA guidance for individuals with self-employment income who file a Form 1040, Schedule C as applying more broadly than we believe was intended by the SBA. The article has been revised to remove this broad application.]
On April 15, 2020, the U.S. Small Business Administration issued a new interim final rule (link) (the “Guidance”) that supplements prior guidance with respect to the Paycheck Protection Program (the “PPP”). Among other things, the Guidance addresses the treatment of partner/owner income for purposes of calculating the maximum loan amount with respect to the PPP. For purposes of this client alert, any reference to an LLC shall mean an LLC which has elected to be treated as a partnership for tax purposes.
The Guidance reaffirms that partnerships (including LLCs) are eligible for PPP loans but clarifies that an individual partner in a partnership (or member of an LLC) may not submit a separate PPP loan application as a self-employed individual.
The Guidance states that self-employment income of a partnership’s partners may be reported as a payroll cost on a PPP application, up to $100,000 annualized. This is the full extent of the discussion of LLC partner income in the updated client alert. Specifically, there is no guidance regarding what documentation is required to be submitted to support the inclusion of these amounts for the loan application or how these amounts will be treated for purposes of forgiveness.
The Guidance goes on to describe in detail how self-employment income for individuals who file a Form 1040, Schedule C should treat such income for purposes of the PPP. It refers to these amounts as “owner compensation replacement.”
It should be noted that based on the language of the Guidance and the fact that “owner compensation replacement” is set forth as a separate item from payroll costs, it implies that “owner compensation replacement” would be treated as a non-payroll cost for purposes of calculating use of the loan proceeds and the forgiveness amount. As a result, “owner compensation replacement” would be subject to the same aggregate cap of 25% of the loan amount applicable to all non-payroll costs and would not count as payroll costs for purposes of determining whether the requirement to use 75% of the loan amount for payroll costs had been satisfied.
If the self-employed applicant intends to borrow PPP funds only to the extent that such borrowed amounts are ultimately forgivable, applicants may wish to carefully consider whether to include “owner compensation replacement” in the loan amount, as it may increase the total amount required to be paid in payroll costs during the 8-week measurement period to a level that is not attainable. Of course, a PPP recipient could use the proceeds of the loan for payroll costs beyond the 8-week measurement period (and may be required to in order to meet the 75% use requirement), but such amounts would not be eligible for forgiveness.
If partnerships previously submitted applications without accounting for self-employment income of its partners, or if self-employed applicants previously submitted applications based on payroll costs only (and not owner compensation) but are interested in increasing the loan amount to account for such compensation, such applicants should discuss with their lenders the impact amending or withdrawing the application may have on the processing of their application. To the extent the PPP loan has already been obtained, we have seen no guidance or anecdotal evidence that the loan amount may be increased in light of this revised guidance.
If you have questions or would like additional information, please feel free to contact Dan Fuchs at dfuchs@hutchlaw.com and he would be happy to assist you.
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