SBA Guidance Appears To Answer The PPP Partnership Question
On April 14, 2020, the Small Business Administration (SBA) issued new guidance aimed at clarifying the eligibility of certain self-employed individuals for loans under the Paycheck Protection Program (PPP). Part of the federal CARES Act, the PPP was designed to provide SBA-guaranteed loans to small businesses – those with fewer than 500 employees – the full principal amount of which, together with interest, is subject to forgiveness if the loan proceeds are used to maintain payroll and other specified expenses during a covered 8-week period. The amount of the loan is pegged to “payroll costs,” which was widely viewed to include payments to employees, contractors and others working for the business. But the statute is not clear on the inclusion of compensation paid to the owners of the business, which can be significant, especially when a small business has multiple owners.
Tuesday’s guidance came in a new Interim Final Rule, which supplements the SBA’s earlier guidance. It clarifies that individuals with income from self-employment that is reported on Form 1040 Schedule C – sole proprietors – are eligible for PPP loans and further that their owner compensation should be included in the same loan application as the business they run. In other words, sole proprietors should not file one application for the business that covers the payroll of their employees and a separate application for themselves, as owners of the business.
That was the new guidance as to sole proprietorships, which are businesses owned by one individual. The new Interim Rule then went on to address small businesses with multiple owners.
Since the PPP was passed, many in service industry circles have debated whether partners in service partnerships like accounting, law and consulting firms and members of limited liability companies (LLCs) are either separately eligible for loans under the program or whether their owner compensation can be included in their firms’ PPP loan applications. The Act itself is not clear on the issue, although it specifically provides that “eligible self-employed individuals shall be eligible to receive a covered loan.” As part of its new guidance, the SBA appears to have answered the question directly: “[S]elf-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.” Individual partners “may not submit a separate PPP loan application.” The same rules apply to “an LLC filing taxes as a partnership.”
The new guidance also states that it has been determined that permitting partners to apply as self-employed individuals would create unnecessary confusion regarding which entity, the partner or the partnership, applies for partner and LLC member income, and would generate loan proceeds use coordination and allocation issues.
For sole proprietorships, the guidance instructs that applicants must provide their Form 1040 Schedule C for 2019. Presumably recognizing that partners and LLC members do not report their compensation on Schedule C, the guidance permits applicants to supply “other tax forms or equivalent payroll processor records containing similar information” to the Schedule C.
The guidance also clarifies that PPP loans based, in part, on income from self-employed individuals are to be used for “owner compensation replacement,” in addition to payroll costs and other approved uses.
On its face, the new guidance on partnerships appears to have arisen less out of a desire to answer the substantive question of eligibility and more from a procedural imperative to improve the application process. The SBA noted that the single application requirement “will allow lenders to more quickly process applications and lower the burdens of applying for partnerships/partners.” Up to this point, the wide spread practice has been to exclude such owner compensation in PPP loan applications for businesses that operate in a partnership or LLC form. Assuming that Congress replenishes the funding for this program, this new guidance will give those partnerships and LLCs that have not already applied for loans the tool they need to obtain relief for their owners in addition to their employees.
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