On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus (“COVID-19”) pandemic. The U.S. Small Business Administration (“SBA”) received funding and authority through the Act to modify existing loan programs and establish a new loan program, the Paycheck Protection Program (“PPP”), to assist small businesses nationwide adversely impacted by the COVID-19 emergency.
The Interim Final Rule posted by SBA on April 2, 2020 indicated that individuals who operate under a sole proprietorship or as an independent contractor or eligible self-employed individual, and were in operation on February 15, 2020, would qualify for PPP loans. However, there were few further substantive details provided in this Interim Final Rule or in the Frequently Asked Questions published by SBA, that pertained to individuals with self-employment income. There were also questions about whether partners in a partnership should be treated as self-employed individuals or whether their income should be included as part of their partnership’s payroll costs (and to what extent) on a PPP loan application for the partnership.
On April 14, 2020, SBA posted an Interim Final Rule to supplement the rule issued on April 2nd, with guidance for individuals with self-employment income who file a Form 1040, Schedule C. This rule also addresses eligibility issues for certain business concerns and requirements for certain pledges of PPP loans. Our COVID-19 team has summarized the guidance for “individuals with self-employment income” that was provided in the April 14 Interim Final Rule in a separate blog post on our website – Latest PPP Rule Includes Guidance for Individuals with Self-Employment Income.
The rule begins with a discussion of PPP loan eligibility criteria for individuals with self-employment income who file a Form 1040, Schedule C. The text then abruptly shifts to providing the following guidance for partners and partnerships:
- 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.
- Partnerships are eligible for PPP loans under the Act, and the Administrator has determined, in consultation with the Secretary of the Treasury, that limiting a partnership and its partners (and an LLC filing taxes as a partnership) to one PPP loan is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of June 30, 2020. This limitation will allow lenders to more quickly process applications and lower the burdens of applying for partnerships/partners.
- The Administrator has further 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. Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners.
- Please be aware that participation in the PPP may affect your eligibility for state-administered unemployment compensation or unemployment assistance programs, including the programs authorized by Title II, Subtitle A of the CARES Act, or CARES Act Employee Retention Credits.
The rule does not address partners or partnerships at any point over the remainder of its text. However, the rule makes it very clear that it is acceptable to include the self-employment income of partners, up to $100,000 annualized, as a payroll cost on a PPP loan application filed by or on behalf of the partnership. Partnerships presumably follow the same set of rules for determining payroll costs, the uses of loan proceeds and loan forgiveness as other small businesses who would not be considered individuals with self-employment income.
For additional information on the Paycheck Protection Program and other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at
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