4.16.20 | Client Alert – COVID-19 Update
On Tuesday, April 14, 2020, the Small Business Administration (“SBA”) published a third Interim Final Rule (“IFR”) prescribing the way in which self-employment income of partners and independent contractors should be handled in connection with loans applied for under the Paycheck Protection Program (“PPP”). A summary of the key provisions is below:
Self-Employment Income of Partners
In order to limit the number of applications that need to be processed, the SBA clarified that partnerships and LLCs should include the self-employment income of general partners and active LLC members, up to $100,000 on an annual basis, as payroll costs on their loan applications. Partners and LLC members therefore, cannot apply for their own loan based upon that income. It is important to note that the IFR broadly references self-employment income and not the more limited guaranteed payment conception. For partnerships and LLCs that have already applied for a loan without factoring in this income in their payroll costs, and in some cases already received the loan proceeds, it is unclear whether they will be permitted to revise or amend their loan applications to include these additional amounts. Nor is it clear whether altering an application or reapplying for a loan will move the applicant to the back of the line and put them at risk of missing out on the funding altogether, as news reports indicate that funding is running out and Congress has yet to agree on an expansion of the program.
Self-Employment Income of Independent Contractors (or Sole Proprietors)
The IFR also elaborated on how independent contractors and sole proprietors (“Schedule C Filers”) calculate PPP loan amounts and maximum loan forgiveness. Most importantly, the SBA is requiring that the income and expenses of the applicant be included on a 2019 1040 Schedule C. In fact, the IFR requires that a copy of the 2019 Schedule C be included with the application, even if the actual tax return has yet to be filed. Therefore, we advise Schedule C Filers interested in applying for a PPP loan to complete their 2019 tax returns as soon as possible, even if not filing until the July 15th deadline. The SBA also recognizes that certain eligible applicants may have started business after the close of 2019 (but before February 15, 2020) and will provide additional guidance on how those companies may apply for PPP loans. In addition to including payroll costs of employees in the same manner as an entity does, Schedule C Filers can also include 2019 net self-employment income (up to $100,000) as shown on schedule C (defined as Owner Compensation Replacement). Borrowed funds must be used in the same manner as entities, plus for Owner Compensation Replacement. However, to get full forgiveness, the amount paid as Owner Compensation Replacement during the 8 weeks after the loan proceeds are received is limited to 8/52 of the 2019 net self-employment income from the business. The IFR also limits the use of loan proceeds for expenses other than payroll costs to no more than 25%. While Owner Compensation Replacement is not expressly defined as a PPP payroll cost, the IFR does imply this. Additionally, the PPP statute expressly includes payments made to independent contractors and self-employed individuals as payroll costs.
While guidance under the PPP program is complex and continues to evolve, many of the troubling issues are being resolved on a borrower favorable basis. The serious concern is that to some it will be too little too late.
For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
Berdon LLP New York Accountants