PPP Update for Partnerships and Self-Employed Individuals
On April 14, 2020, the Department of Treasury released a third interim final rule relating to the paycheck protection program (“PPP”) funds, to the extent authorized and available. The full text of the rule can be found here. The new interim final rule relates to the treatment of partners in a partnership and self-employed individuals (including independent contractors) under the PPP program (read Kleinberg Kaplan’s other PPP updates here). The material terms of the interim final rule are as follows:
Partners in Partnerships
- Partnerships (and LLCs taxed as partnerships) are eligible for PPP loans, but must file as a partnership and not as individuals. This is designed to reduce administrative burden by reducing the number of PPP applications to be processed by approved lenders.
- The self-employment income of general active partners in a partnership may be included in the payroll calculation for a partnership up to a maximum annualized income of $100,000 per general active partner.
Self-Employed Individuals and Independent Contractors
- Self-employed individuals are eligible for the PPP if: (1) they were in operation on February 15, 2020, (2) they are an individual with self-employment income (e.g., sole proprietor or independent contractor), (3) their principal residence is in the United States, and (4) they filed a Form 1040 Schedule C for tax year 2019; provided that partners in partnerships are not eligible to apply for a PPP loan as an individual.
- Specific steps are provided to calculate the total loan amount for individuals that have employees and for individuals that do not have employees. In each case, the maximum amount is equal to 2.5 times payroll, which is capped at an annualized $100,000 income per employee or individual.
- At least seventy-five percent (75%) of the PPP loan must be used for payroll costs. The use of proceeds for PPP loans to individuals includes the owner’s compensation replacement, which is calculated based on 2019 net profit, but limited to a $100,000 annualized net profit. Otherwise, the use of proceeds for individuals are the same as those for other businesses.
- The use of proceeds will be limited to those types of allowable uses for which the borrower made expenditures in 2019. In calculating expenses, only expenses that are verified on the individual’s tax documentation for 2019 may be used to as evidence of expenses. Therefore, expenses incurred between January 1, 2020, and February 14, 2020, may not be considered because of the lack of verifiable documentation on expenses in this period.
- Owner’s compensation replacement is an eligible use of proceed for forgiveness purposes. This is calculated as the an eight-week share of 2019 net profit. The determination of the amount to be forgiven for each self-employed individual is (8/52) multiplied by 2019 net profit attributable to the individual based on the individual’s 2019 Form 1040 Schedule C. Interestingly, this means that although each business is eligible for a maximum loan amount of 2.5 times monthly payroll costs, the business will only be eligible for 2 times monthly payroll costs for forgiveness purposes (plus the other forgivable uses of proceeds, such as rent, utilities and interest on mortgages or preexisting debt obligations).
- The Small Business Administration will issue additional guidance for those individuals with self-employment income who: (1) were not in operation in 2019 but who were in operation on February 15, 2020, and (2) will file a Form 1040 Schedule C for 2020.
We understand that these are challenging times for our clients and friends. Kleinberg Kaplan has been diligently monitoring the updates and developments pertaining to COVID-19 and the potential impact for our clients. We will continue to provide updates as the situation develops.
Our attorneys are available to discuss with you these provisions, as well as other COVID-19 legislation, regulations and executive orders. You can find other helpful COVID-19 related materials here, at our COVID-19 resource page.