New SBA Guidance Allows PPP Loan Increases for Partnerships

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New SBA Guidance Allows PPP Loan Increases for Partnerships
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Riker Danzig Corporate Client ALERT re New SBA Guidance Allows PPP Loan Increases for Partnerships
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New SBA Guidance Allows PPP Loan Increases for Partnerships

The Small Business Administration (SBA) has released a new interim final rule addressing its changed approach to partner compensation for purposes of calculating the maximum allowable loan amount under the Paycheck Protection Program (PPP).  Under the PPP’s original rules, the treatment of partnership compensation was unclear and, as a result, many lenders did not permit borrowers to take into account partner compensation when calculating their maximum loan amounts.  In an interim final rule published on April 14, 2020, the SBA subsequently clarified its position that partnership compensation is in fact includible in a borrower’s computation, but this guidance came too late for many borrowers who had already submitted their applications under the old rule.  The new interim final rule permits borrowers to obtain an increase to their loan amount under certain circumstances if they did not receive the maximum amount to which they could otherwise have been entitled.

Partnerships can now count as part of “payroll costs” the compensation paid to general active partners, up to $100,000 annualized per partner, in determining the maximum loan amount to which they are entitled.  A borrower can apply for a loan increase based on this new calculation, provided that the borrower’s lender has not yet filed an SBA Form 1502 (a lender reporting form) with respect to the loan.  Borrowers who believe they may be eligible for a loan increase should contact their lender as soon as possible to determine whether they can take advantage of the rule change.

The interim final rule contains similar relief for businesses with seasonal employees.  Seasonal employers who applied under the old rules can now seek a loan increase based on the alternative criterion published by the SBA on April 28, 2020. 

Borrowers who may now be eligible for additional loan funds should keep in mind Questions 31 and 46 of the SBA’s Frequently Asked Questions, which emphasize the importance of a borrower’s good faith certification that funds are necessary to support ongoing operations, taking into account current business activity and other sources of liquidity.  Borrowers should also consider whether additional funds will increase their exposure to an audit by placing their aggregate loan amount above the $2 million audit threshold, thereby also risking loss of forgiveness on the entire loan amount, and not just the new portion. 

Please contact Jason NavarinoRich LomuscioHannah Greendyk or any member of Riker Danzig’s Corporate and Tax Departments if you have questions about how these changes may apply to you or your business. 

Please visit Riker Danzig’s COVID-19 Resource Center to stay up to date on all related legal issues.