As the bumpy rollout of the SBA’s Paycheck Protection Program continues, the SBA provided new interim guidance permitting organizations to request an increase in the loan amount to include partnership income up to $100,000.
As partners and business owners are not traditionally considered employees, it was previously an open question whether partners’ income could be included in payroll costs when calculating the loan amount. This newly released interim rule now clarifies that partners’ income may be included when calculating a business’ PPP loan amount and permits organizations to request an increased loan to include this income.
The interim rule provides that:
if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. Instead, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.
Accordingly, a partner’s income may be included up to $100,000, annualized, when calculating the loan amount. The new interim rule now permits lenders to increase the existing PPP loans to partnerships to include appropriate amounts to cover partner compensation. This loan amount may be increased even after the loan proceeds have already been disbursed. However, the $10 million loan cap still applies.
When determining how to calculate the payroll loan amount, an FAQ issued by the Treasury Department on April 24, 2020, provides the following methodology for calculating the loan amount for partnerships:
Question: How do partnerships apply for PPP loans and how is the maximum PPP loan amount calculated for partnerships (up to $10 million)? Should partners’ self-employment income be included on the business entity level PPP loan application or on separate PPP loan applications for each partner?
(Note that PPP loan forgiveness amounts will depend, in part, on the total amount spent during the eight-week period following the first disbursement of the PPP loan.)
Answer: The following methodology should be used to calculate the maximum amount that can be borrowed for partnerships (partners’ self-employment income should be included on the partnership’s PPP loan application; individual partners may not apply for separate PPP loans):
Step 1: Compute 2019 payroll costs by adding the following:
- 2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment of individual U.S. based general partners that are subject to self-employment tax, computed from box 14a (reduced by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties) multiplied by 0.9235, 2 up to $100,000 per partner (if 2019 schedules have not been filed, fill them out);
- 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States, if any, which can be computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c-column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips, subtracting any amounts paid to any individual employee in excess of $100,000 and any amounts paid to any employee whose principal place of residence is outside the U.S;
- 2019 employer contributions for employee health insurance, if any (portion of IRS Form 1065 line 19 attributable to health insurance); o 2019 employer contributions to employee retirement plans, if any (IRS Form 1065 line 18); and 2 This treatment follows the computation of self-employment tax from IRS Form 1040 Schedule SE Section A line 4 and removes the “employer” share of self-employment tax, consistent with how payroll costs for employees in the partnership are determined.
- 2019 employer state and local taxes assessed on employee compensation, primarily state unemployment insurance tax (from state quarterly wage reporting forms), if any.
Step 2: Calculate the average monthly payroll costs (divide the amount from Step 1 by 12).
Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5.
Step 4: Add any outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid). The partnership’s 2019 IRS Form 1065 (including K-1s) and other relevant supporting documentation if the partnership has employees, including the 2019 IRS Form 941 and state quarterly wage unemployment insurance tax reporting form from each quarter (or equivalent payroll processor records or IRS Wage and Tax Statements) along with records of any retirement or health insurance contributions, must be provided to substantiate the applied-for PPP loan amount. If the partnership has employees, a payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish the partnership was in operation and had employees on that date. If the partnership has no employees, an invoice, bank statement, or book of record establishing the partnership was in operation on February 15, 2020 must instead be provided.
The attorneys in Forchelli Deegan Terrana LLP’s Employment & Labor practice group will continue to keep you updated on any changes to your requirements as an employer as updates become available. Should you have and questions, do not hesitate to contact me at the below contact information.
Battling the novel Coronavirus is difficult for everyone. We are here if you need us. With best wishes for your, and your family’s health and safety.
Gregory S. Lisi, Esq., Partner-in-Charge, Employment & Labor practice group (GLisi@Forchellilaw.com | 516.248.1700)
Lisa M. Casa, Esq., Associate, Employment & Labor practice group (LCasa@Forchellilaw.com | 516.248.1700)