Paycheck Protection Program Runs Dry, but New SBA Guidance Still Helpful for Businesses Already in the Program
On April 16, 2020, the Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) is no longer accepting new applications, as all funds appropriated to the PPP by Congress have been allocated. Two days earlier, the SBA released an Interim Final Rule that provides important clarifications regarding self-employment income of Form 1040 Schedule C filers and partners in businesses that are partnerships for tax purposes. While the PPP is no longer accepting applications at this time, the Interim Final Rule provides helpful guidance with respect to partnerships and limited liability companies that have already received funding under the PPP.
Under the PPP’s loan forgiveness provisions, the SBA will forgive an amount of the loan that is based on amounts expended by the borrower for payroll costs, interest on covered mortgage obligations, rent and utilities during the eight-week period following the origination of the loan, not to exceed the principal amount of the loan. In addition, amounts expended for non-payroll costs (i.e., mortgage, rent and utility payments) cannot exceed 25% of the loan proceeds.
With respect to sole proprietors and owners of single member LLCs that are disregarded entities for federal income tax purposes – those that report their business income on Schedule C – the Interim Final Rule indicates how payroll costs should take into account the owner’s self-employment income, depending on whether or not the business has separate W-2 employees.
As for partnerships for tax purposes, “payroll costs” was previously understood to exclude self-employment income and distributions to partners (e.g., members of limited liability companies taxed as partnerships, or partners of limited liability partnerships). Now, the SBA guidance makes it clear that “payroll costs” includes such income and distributions to the extent paid to “general active partners” (which is undefined but presumably excludes limited partners in limited partnerships, retired partners and investors who do not provide services), treated as self-employment income for tax purposes, and not in excess of $100,000 per year. This means that PPP borrowers can use loan proceeds to pay such costs without negatively impacting their forgiveness amount. Borrowers may also now find it easier to ensure that at least 75% of the loan proceeds is spent on payroll costs.
If you have any questions about how these relief provisions, and other provisions under other federal or state programs, may apply to you or your business, please contact Jason Navarino, Rich Lomuscio, Hannah Greendyk or any member of Riker Danzig’s Corporate and Tax Departments.