SBA Paycheck Protection Program Update
Laws and regulations are changing rapidly. After the publication of this article they are subject to change. Check back regularly for updates.
The Small Business Administration has just (April 14, 2020) issued an additional Interim Final Rule to address an issue that has been simmering since the Paycheck Protection Program was introduced. That issue is the loan eligibility of partners in partnerships (and owners of LLCs taxed as partnerships). Many banks interpreted the initial guidance from the SBA, or lack thereof, as a prohibition against partners being included in the loan application for the business entity. Based on that, many business owners that take regular distributions from the partnership as their only compensation, in lieu of a W-2 salary, were excluded from the loan calculation done on behalf of their businesses.
Instead, many partners were directed to file individual applications related to their individual compensation just as independent contractors were instructed. That guidance never seemed to fit the situation of Schedule K-1 partners, but many lenders viewed as the only way partners in a partnership could apply under the PPP. Now, the new SBA guidance states that a partner in a partnership may not submit an individual PPP loan application as a self-employed individual. The rule states that “[i]nstead, 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.”
While that guidance seemingly clarifies the issue and makes it easier for partnerships moving forward, this is guidance does not address the status of those partners and business owners that were diligent enough to have already submitted PPP applications or received loan funds on behalf of their business entities, but which excluded their own compensation. We hope to see additional guidance on how those partners and business owners will be treated, before the current appropriation becomes over-subscribed.