Editor’s note: Dan Fuchs and Jeremy Freifeld are lawyers with Hutchinson SARL.

On April 15, 2020, the U.S. Small Business Administration released a new interim final rule (link) (the “Guidelines”) which supplement previous guidelines for the Paycheque Protection Program (the “PPP”). Among other things, the Guide deals with the treatment of partner / owner income for the purpose of calculating the maximum loan amount and loan cancellation with respect to the PPP. For the purposes of this Client Alert, any reference to an LLC means an LLC that has elected to be treated as a partnership for tax purposes.

The Guide reaffirms that partnerships (including LLCs) are eligible for PPP loans, but clarifies that an individual partner in a partnership (or member of an LLC) cannot submit a separate PPP loan application as a. independent.

In addition, the Guide describes two methods (and the supporting documents required) for calculating the maximum loan amount: one for partnerships with employees and another for partnerships without employees. In particular, the Guidelines indicate that the self-employment income of partners in a partnership can be included in the calculation of the maximum loan amount. This “owner’s compensation” is based on each partner’s 2019 net profit amount on Form 1040, Schedule C, line 31, subject to a cap of $ 100,000 per partner. The requesting partnership will be required to submit this documentation to the lender whether or not the partner has yet filed a 2019 tax return with the IRS.

It should be noted that based on the language of the Guide and the fact that “replacement of owner’s compensation” is presented as a separate item of wage costs, this implies that “replacement of owner’s compensation” would be treated as a non-salary cost for the purposes of calculating the use of loan proceeds and the amount of forgiveness. Therefore, the “replacement of owner’s compensation” would be subject to the same overall limit of 25% of the loan amount applicable to all non-wage costs and would not be considered as labor costs for the purposes of determining whether the obligation to use 75% of the loan amount for salary costs had been paid.

If the applicant intends to borrow PPP funds only to the extent that those borrowed amounts are ultimately forgivable, applicants may wish to carefully consider whether to include “homeowner’s compensation replacement” in the amount of the loan. loan, as this may increase the total amount payable. wage costs during the 8 week measurement period to a level which is not achievable. Of course, a PPP recipient could use the loan proceeds for salary costs beyond the 8 week measurement period (and may be required to do so to meet the 75% utilization requirement), but these amounts would not be eligible for a discount.

If partnerships have previously submitted claims based on salary costs only (not owner’s compensation) but wish to increase the loan amount to accommodate owner’s compensation, these applicants should discuss with their lenders how The impact that the modification or withdrawal of the request may have on the processing of requests. their candidacy.

If you have any questions or would like additional information, please do not hesitate to contact Dan Fuchs at [email protected] or Jeremy Freifeld at [email protected] and they will be happy to assist you.

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This alert is provided for informational purposes only and is not intended to be, nor should be construed as, legal advice on any specific matter, nor does it represent a commitment to keep recipients informed of all relevant legal developments. This alert does not create or constitute an invitation to create an attorney-client relationship, nor should it be construed as an advertisement or a solicitation of legal services. This material can be considered Lawyer Advertising in some states. Previous results do not guarantee a similar result.

© 2020 Hutchison SARL

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