Client Alert: SBA Issues Additional Guidance for Self-Employed and PPP Borrowers Taxed as Partnerships | Hutchison SARL

[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 US Small Business Administration released a new Interim Final Rule (link) (the “Advice”) which supplements the previous advice regarding the Paycheck Protection Program (the “PPP”). Among other things, the Guidelines address the treatment of partner/owner income for the purpose of calculating the maximum loan amount under the PPP. For the purposes of this Client Alert, any reference to an LLC means an LLC that has elected to be treated as a partnership for tax purposes.

The Guide reaffirms that partnerships (including LLCs) are eligible for PPP loans, but clarifies that an individual partner of a partnership (or member of an LLC) cannot submit a separate PPP loan application as a self employed.

The guidelines state that the self-employment income of partnership partners can be reported as a salary cost on a P3 application, up to $100,000 annualized. That’s the full extent of the LLC Partner Revenue discussion in the updated Client Alert. Specifically, there is no guidance as to what documentation must be submitted to support the inclusion of these amounts in the loan application or how these amounts will be treated for forgiveness.

The guidelines then outline in detail how self-employment income for individuals filing a Form 1040, Schedule C should treat that income for PPP purposes. It refers to these amounts as “owner’s compensation replacement”.

It should be noted that based on the wording of the guidelines and the fact that ‘owner’s compensation replacement’ is presented as a separate element of salary costs, this implies that ‘owner’s compensation replacement’ would be treated as a non-salary cost for purposes of calculating the use of loan proceeds and the forgiveness amount. Therefore, the “homeowner’s compensation replacement” would be subject to the same aggregate cap of 25% of the loan amount applicable to all non-salary costs and would not count as salary costs for the purposes of determining whether the to use 75% of the loan amount for personnel costs had been satisfied.

If the Independent Applicant intends to borrow PPP funds only to the extent that such borrowed amounts are ultimately repayable, Applicants may wish to carefully consider whether to include “Owner’s Compensation Replacement” in the amount. of the loan, as this may increase the total amount required to be paid in personnel expenses during the 8-week measurement period to a level that is not achievable. Of course, a PPP recipient could use loan proceeds for payroll costs beyond the 8-week measurement period (and might be required to do so to meet the 75% utilization requirement), but these amounts would not be eligible for the rebate.

If partnerships have previously submitted applications without considering their partners’ self-employment income, or if independent applicants have previously submitted applications based solely on payroll costs (not owner compensation), but wish to increase the amount of the loan to reflect this remuneration, these applicants should discuss with their lenders the impact that the modification or withdrawal of the application may have on the processing of their application. As the PPP loan has already been secured, we have seen no indication or anecdotal evidence that the loan amount could be increased in light of these revised guidelines.

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