Editor’s note: Dan Fuchs and Jeremy Freifeld are attorneys with Hutchinson PLLC.

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 and loan forgiveness 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.

In addition, the Guidance describes two methods (and the required supporting documentation) for calculating the maximum loan amount: one method for partnerships with employees and another for partnerships without employees. Notably, the Guidance states that self-employment income of a partnership’s partners may be included in calculating the maximum loan amount. Such “owner compensation” is based on each partner’s individual 2019 Form 1040 Schedule C line 31 net profit amount, subject to a cap of $100,000 per partner. The applicant partnership will be required to submit this documentation to the lender regardless of whether or not the partner has filed a 2019 tax return with the IRS yet.

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 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 based on payroll costs only (and not owner compensation) but are interested in increasing the loan amount to account for owner compensation, such applicants should discuss with their lenders the impact amending or withdrawing the application may have on the processing of their application.

If you have questions or would like additional information, please feel free to contact Dan Fuchs at dfuchs@hutchlaw.com or Jeremy Freifeld at jfreifeld@hutchlaw.com and they would be happy to assist you.


This Alert is provided for informational purposes only and is not intended to be, nor should it be construed as, legal advice on any specific matter, nor does it represent any undertaking to keep recipients advised of all relevant legal developments. This Alert does not create or constitute an invitation to create an attorney-client relationship, nor should it be construed as an advertisement or solicitation for legal services. This material may be considered Attorney Advertising in some states. Prior results do not guarantee a similar outcome.

© 2020 Hutchison PLLC

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