New Guidance from the Small Business Administration Answers Certain Questions Concerning Eligibility Under the CARES Act’s Paycheck Protection Program And Clarifies Definition of “Payroll Costs” for Partners and LLC Members
Earlier this week, the Small Business Administration (“SBA”) issued further guidance on “Eligibility Criteria and Requirements” for borrowers in connection with loans made under the CARES Act’s Paycheck Protection Program (“PPP”). Click here to view. The supplemental guidance contains answers to fundamental questions concerning eligibility for self-employed sole proprietors, independent contractors, and, of greatest relevance to multi-physician practices, partners in a “partnership.”
Drafted as a formal set of FAQs, the supplemental guidance asks and then answers a series of questions, among which was whether those who received “income from self-employment and file a Form 1040 Schedule C . . . eligible for a PPP loan?” In response, the SBA answers that you are eligible if “(i) you were in operation on February 15, 2020; (ii) you are an individual with self-employment income (such as an independent contractor or a sole proprietor); (iii) your principal place of residence is in the United States; and (iv) you filed or will file a Form 1040 Schedule C for 2019.” You are not eligible for a PPP loan, however, “if you are a partner in a partnership[,]” or a member of an “LLC filing taxes as a partnership[.]” This is because the agency has determined “that permitting partners to apply as self-employed individuals would create unnecessary confusion regarding which entity, the partner or the partnership, applies for partner and LLC member income, and would generate loan proceeds use coordination and allocation issues.”
Importantly, the supplemental guidance further states that “self-employment income of general active partners may [nonetheless] be reported as payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership.” This latter point could, depending on the size of a practice and the number of physician-owners, significantly increase the maximum allowable loan amount. Practices who have already submitted applications under the PPP but who did not include this value, may therefore wish to consider making a supplemental filing with this information. The guidance is less clear on how or whether “general active partner” self-employment income may be included in calculating the total allowable loan forgiveness amount, however, as it permits “owner[s]” to include this amount in the forgiveness calculus, but does not use the term “partner.” Nevertheless, it stands to reason that if the SBA intended to permit “general active partners” to include self-employment as a payroll cost for determining the maximum loan amount, that it likewise intended to permit general active partners to use this figure in calculating forgiveness as well, since, under the right circumstances, the forgiveness amount calculation was designed to reach a ceiling of up to 100% of the loan amount. See CARES Act at § 1106(d)(1).