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BHBM Tax Law Alert | SBA Issues Guidance Regarding Application of PPP to Partnerships and Self-Employed


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FEDERAL TAX LAW UPDATE

SBA Issues Guidance Regarding Application of Paycheck Protection Program Rules to Partnerships and Other Self-Employed Individuals

There has been some confusion over the eligibility and reporting requirements for partners in partnerships and other self-employed individuals with respect to the applications required under the “Paycheck Protection Program” (the “PPP”)[1].  On April 14, 2020, the SBA released a supplement (the “Rule”) to the initial PPP Interim Final Rule, published on April 2, 2020 which provides clarity on some of these issues.

Clarification Regarding Self-Employment Income

A. PPP Loan Eligibility for Partners in Partnerships

Prior to issuance of the Rule, it was unclear whether partners in a partnership were eligible for a PPP loan in their individual right or if the draws or income allocated to the partner should instead be included as qualified “payroll costs” for purposes of the PPP loan of the respective partnership.

The Rule clarifies that the self-employment income of active partners[2] from a partnership should be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership, and that the partner cannot submit a separate PPP loan application for himself or herself as a self-employed individual in connection with the income from the partnership.

For PPP purposes, members of an LLC taxed as a partnership for tax purposes should be treated in the same manner as partners of a partnership, and references in the Rule indicate the same.

B. PPP Loan Eligibility for Self-Employed Individuals

In addition, the Rule clarifies that an individual with self-employment income (such as an independent contractor or a sole proprietor) is eligible for a PPP loan if all of the following apply:

(1) He or she was in operation on February 15, 2020;

(2) His or her principal place of residence is in the United States; and

(3) He or she filed or will file a Form 1040 Schedule C for 2019.

C. Maximum Loan Amount

The maximum loan amount for a self-employed individual with no employees is determined by:

(1) taking the net profit amount from the individual’s 2019 IRS Form 1040 (if the amount is over $100,000, the amount is reduced to $100,000),

(2) dividing the net profit amount by 12 to find the average monthly net profit amount, and

(3) multiplying the average monthly net profit amount by 2.5.

The process for determining the maximum loan amount for a self-employed individual who has employees uses the same general formula but also takes into consideration payments made to employees whose principal residence is in the U.S., employee contributions for health insurance and other fringe benefits, employer health insurance contributions, employer retirement contributions, and state and local taxes assessed on employee compensation.

D. Permitted Uses of PPP Loan Proceeds

Self-employed individuals who receive a PPP loan may use the proceeds for owner compensation replacement (subject to any applicable cap) as well as for other specified uses set forth in the Rule (e.g., certain employee payroll costs, mortgage interest payments, business rent payments, business utility payments, and interest payments on any other debt obligations that were incurred before February 15, 2020 (though such amounts are not eligible for loan forgiveness).

It should be noted that an individual’s use of loan proceeds is limited to the types of allowable uses for which the borrower made expenditures in 2019.

Additionally, at least 75% of the PPP loan proceeds must be used for payroll costs.

E. Loan Forgiveness

The amount of loan forgiveness can be up to the full principal amount of the loan plus accrued interest, and 75% of the amount forgiven must be attributable to payroll costs.

For individuals with self-employment income who file a Schedule C, the forgiveness of owner compensation replacement is limited to eight weeks’ worth of 2019 net profit.


[1] Please note that the $349 billion in initial funding for the PPP has been depleted. Congress is currently considering allocating additional funds for the PPP, though no legislation has been enacted in connection with additional funding at this time.

[2] Please note that actual text of the Rule uses the term “general active partner”; however, we are of the belief that this provision of the Rule applies to “active partners” in a partnership. This interpretation may be subject to change based on further SBA guidance.

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