In the April 20 IFR, the SBA allowed partnerships to include a partner’s self-employment income as part of the partnership’s payroll costs. Please read the full details here. $20,833 for … if the Borrower has elected an 8-week Covered Period, the forgiveness amount requested does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual. This can be demonstrated by comparing two hypothetical businesses, each with one owner-employee. Introducing PRO ComplianceThe essential resource for in-house professionals. You should select a time period consistent with the SBA’s guidance on payroll costs eligible for forgiveness. The 2.5/12 method for calculating owner compensation replacement for 24 weeks covered period is one of the major changes that came out of the latest revision of the Interim Final Rules for Sole Proprietors and Independent Contractors. Each borrower has a Loan Forgiveness Covered Period (LFCP) (described below). Although we have seen on several occasions that the SBA does not feel bound by the language of the enabling statute, most of those regulatory changes fall into two categories: (i) promote the articulated purpose of the CARES Act even if they deviate from the actual language or (ii) facilitate administrative convenience for borrowers.5. While the concept of owner-employee compensation was initially used by the SBA to calculate the amount that a small business with no employees was eligible for, with the expansion of the eligible covered period, the Treasury and SBA have also added restrictions on the use of compensation to “owner-employees” in calculation of the amount of payroll costs eligible for forgiveness. If the … The 8/52 cap reduces the forgiveness for Joe to $19,230.77 ($125,000 * 8/52). The maximum loan attributable to and forgiveness available for the “compensation paid” to any owner-employee across all businesses is • $15,385 for borrowers who received a PPP loan before June 5, 2020, and elected to use an eight-week covered period, or • $20,833 for borrowers under the 24-week covered period. As an initial matter, the SBA never defines this term. PPP loans made before June 5, 2020 may have an 8-week covered period, if the borrower elects to do so. PPP loans were to pay for (1) payroll costs, (2) rent or mortgage payments, and (3) utilities payments. We are hopeful that the Treasury and SBA will ultimately provide guidance that any compensation reported on IRS Form W-2 could be excluded from being considered “compensation for any owner-employee.” We also note the definition of “owner-employee” found in Section 401(c)(3) of the Internal Revenue Code which provides that the “term ‘owner-employee’ means an employee who— (A) owns the entire interest in an unincorporated trade or business, or (B) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.” However, we note there is no universal definition of an “owner-employee” in income tax laws and that the language is sometimes used interchangeably. The maximum PPP loan amounts and forgiveness for owner-employee corporations are also subject to the $20,833 cap for 24-week covered periods and the $15,385 cap … In the May 22 IFR, the SBA neither reiterates nor expands on this justification. Answer. Forgivable costs and amounts. For loans made before June 5, 2020, you can choose to use either an 8-week or 24-week loan forgiveness covered period. An employee with unvested restricted stock; is the answer different if the stock is considered vested for tax purposes by reason of an IRC § 83(b) election. Specifically, the new guidelines state that an owner-employee in a C or S … Payroll costs paid or incurred by a business during the eight-week period for determining forgivable costs generally include (1) cash compensation capped at $15,385 per employee; (2) employer contributions for retirement and healthcare, which have no cap; and (3) state and local taxes assessed on employee compensation. On April 24, 2020 Treasury released guidelines for calculating the maximum loan amount by business entity, and we are sharing that information here. A new Interim Final Rule (IFR) from the U.S. Small Business Administration (SBA) supports the use of bonuses and hazard pay and solidifies use of Paycheck Protection Program (PPP) loan proceeds for costs paid or incurred during the Covered Period, but it also adds a new owner-employee concept. An employee whose spouse owns the stock (or options or phantom equity contemplated above) — as community property; is the answer different if the property is separate property or held in a state without community property or if the employee owns shares sometime during the eight-week forgiveness period because their spouse just died and left them their stock or who just shared the stock via a martial gift. However, the SBA, without explanation, now subjects a new type of owner to the limitation invented in the April 20 IFR: “owner-employees.” That is, while the April 20 IFR only discussed Schedule C files and general partners, Line 9 of PPP Schedule A is for “owner-employees, a self-employed individual, or general partners.” There is no explanation in the application of when an employee falls into this new category of “owner-employee” so we initially thought that the SBA was using some sort of short hand to pick up all sole proprietors and “1099 contractors.”. The U.S. Small Business Administration (SBA) and Treasury issued an interim final rule Monday addressing Paycheck Protection Program (PPP) forgiveness issues related to owner-employee compensation and the eligibility of nonpayroll costs. Generally, the PPP loan amount that businesses qualify for is based on their average payroll expenses. The SBA explained its reason for excluding retirement and healthcare contributions from payroll costs for Schedule C filers and general partners in the May 22 IFR: “No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.”. The SBA has yet to explain the basis for excluding from its definition of payroll costs an item explicitly included by Congress in its definition of that term. On August 4, the SBA released a FAQ on PPP loan forgiveness. Further, for employees who are not owners, businesses generally can increase payroll cost by paying additional compensation (subject to the $15,385 cap) or increasing contributions for retirement and healthcare. Under the new rules, owners of 5 percent or more of the business who are also employees are eligible for loan forgiveness of up to 20.83 percent of their 2019 employee cash compensation (capped at $20,833), with cash compensation defined as it is for all other employees (Box 1 on the W-2).4 Limiting forgiveness to eight weeks of net profit from the owner’s 2019 Form 1040 Schedule C is consistent with the structure of the Act, which provides for loan forgiveness based on eight weeks of expenditures. That is, while the April 20 IFR only discussed Schedule C files and general partners, Line 9 of PPP Schedule A is for “owner-employees, a self-employed individual, or general partners.”. Further, there is no basis in the CARES Act for disparate treatment of employees depending on ownership of a corporate borrower. The loan forgiveness application incorporates the 8/52 limitation described in the April 20 IFR in line 9 of the PPP Schedule A. And at the time of submission, I had not yet started paying myself a salary. We hope that the SBA will reconsider its position on employer-owners or at least explain what the rationale so we have a basis for understanding how to apply this new concept. The First Loan Forgiveness Rule, as revised by the Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, 85 FR 38304, 38307 (June 26, 2020), caps the amount of loan forgiveness for payroll compensation attributable to an owner-employee. Loans are considered to be “made” on the date the SBA assigned a loan number to your PPP Loan. Absent the 8/52 cap, the forgiveness for Joe is $21,846.54 and the forgiveness for Thurston is $25,692.69 — the $3,846.15 difference results entirely from the $25,000 difference between the retirement contributions ($25,000 * 8/52 = $3,846.15). Unfortunately, it was released late in the process after many businesses already applied. I find Lexology a helpful and enjoyable update on current issues and would like to continue reading it. An employee whose parents own 100 percent of stock. Again, this includes payroll costs (including sick leave, retirement plans, and health insurance and insurance premiums), utility payments, rent, and mortgage interest payments. Question. If the owner laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This lack of clarity as to which employee should be deemed an “owner-employee” is problematic for PPP borrowers seeking to maximize forgiveness because the per non-owner employee cap for the 24-week forgiveness period is $46,154 whereas the per owner-employee cap is … This clarifies earlier guidance that capped the owner-employee compensation regardless of what stake they have in the business. PPP loans were to pay for (1) payroll costs, (2) rent or mortgage payments, and (3) utilities payments. It is the paycheck protection program, not the paycheck enhancement program. Pending further guidance from the SBA and the Treasury, and recognizing the availability of the 24-week covered period, our current advice is to consider whether the borrower could be entitled to 100% forgiveness while limiting any employee with an ownership interest in the borrower to the caps applicable to “owner-employees.” While we acknowledge that this will require additional work to prepare the documentation and may ultimately prove more conservative than necessary, it can also be a relatively easy means to counter the uncertainty of interpretations under the PPP loan forgiveness program, particularly for borrowers that should expect further SBA review due to the size of their PPP loan. Each borrower has a Loan Forgiveness Covered Period (LFCP) (described below). This limitation will also help to ensure that the finite appropriations are directed toward payroll protection, consistent with the Act’s central objective. For example, because the SBA now discriminates against employees who happen to own shares of the business’s stock, the business now has to identify these employees and undertake special calculations for these employees — possibly penalizing employers who have enabled employees to participate in ownership. Why is this important? The full document – and the answers! – is available here.. 1) General loan forgiveness FAQs Owner-employees owning less than a 5% interest in a C- or S-corporation are not subject to the owner-employee compensation restriction. They are also particularly egregious when the borrower has already made business decisions such as how much to pay employees who are working extra hard during these difficult times and to sell additional shares to some employees to raise capital to support operations. It’s the latter that can create problems when it comes to qualifying for PPP. However, the SBA guidance also indicates that owner-employees of C-Corporations, S-Corporations and LLCs are subject to the owner-employee compensation limits, and the SBA guidance is silent on limited partners. My wife owns 100 percent of the S corporation. Indeed, we appreciate that the April 20 IFR explained the rationale for the “8/52 of 2019 net” cap for Schedule C filers: For individuals with self-employment income who file a Schedule C, the Administrator, in consultation with the Secretary, has determined that it is appropriate to limit loan forgiveness to a proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C. This is because many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the Act. An employee who acquired his/her interest on January 1 of this year but who was a non-owner employee last year or who was not even an employee last year. PPP Updates: Extension of the Application Deadline, Disclosure of PPP Borrowers Receiving Greater than $150,000 in PPP Loans, and the “Owner-Employee” Dilemma * Dave Vallance Corporate Counsel The rules and application process for PPP loans and forgiveness have been modified, with more businesses eligible for PPP loans, more expenses forgivable, and a simplified application process. In Silicon Valley, many startups has stock owned by its employees. Such a cross-reference would eliminate the consternation expressed in this article. However, the SBA’s additional limits for owner-employees is harder to understand. Imposing an additional limitation on these employees does not seem fair – or implementable – at least not without some meaningful guidance. Absent further clarification of scope, intent and rationale, we suspect many corporate PPP borrowers and their advisors may feel comfortable relying on the only definition of owner-employee available to them (in IRC Section 401(c)(3); see footnote 4) when completing their forgiveness applications, and that definition excludes shareholder-employees. AAFCPAs would like to make clients aware that the U.S. Treasury and Small Business Administration (SBA) released an interim final rule Monday, August 24th, addressing Paycheck Protection Program (PPP) forgiveness issues related to owner-employee compensation and the eligibility of non-payroll costs. Answer: The following methodology should be used to calculate the maximum amount that can be borrowed if you are self-employed and have no employees, and your principal We do not find fault with this position. PPP borrowers that are C- or S- corporations be aware that if any of your employees hold more than 5% of the equity (shares or membership interests), they are subject to the owner-employee caps. The topic of the questions answered in this portion of the IFR was labeled “Individuals with Self-Employment Income Who File a Form 1040 Schedule C,” (emphasis added). The earlier IFR never used the term “owner-employees.”, The loan forgiveness application incorporates the 8/52 limitation described in the April 20 IFR in line 9 of the PPP Schedule A. 2. The Cash compensation report for PPP Loan Forgiveness uses the time period you select for purposes of your PPP Loan Forgiveness Application. It is inconceivable that the SBA intended to discriminate in favor of the wealthy. Owner compensation eligible for loan forgiveness will be based upon the amount recognized in 2019 either from the W-2, Schedule C or Schedule K-1 using a factor of 2.5/12. What if an owner-employee works more hours or in a different position with a different salary than they did in 2019? Before proceeding, please note: If you are not a current client of Lane Powell PC, please do not include any information in this email that you or someone else considers to be confidential or secret in nature. Now I have the PPP money from the bank but cannot get it forgiven through contractor payments. But if you’re still considering applying for a PPP loan, it may prove helpful. An employee who holds .01 percent of the equity; is the answer different if the employee owns three percent or 49 percent. Here are the questions. In addition, the healthcare premium increased for each by $2,000. Under the new rule, compensation paid to individuals who own less than 5% of the PPP borrower that is an S-corporation or a C-corporation is not subject to the owner-employee … Creating and imposing a limitation not based on the CARES Act has real implications. an “owner-employee” subject to the limits you describe in PPP Loan Forgiveness for Partnerships and S and C Corporations?. S Corporation Owner-Employee with No W-2. The maximum amount allowed is $20,833. As an owner of a corporation, this should only be the amount you have paid yourself by running payroll. Allowing such a self-employed individual to treat the full amount of a PPP loan as net income would result in a windfall. Before we examine the owner-employee concept further, it is worth placing the discussion in context for those who haven’t dedicated the last few weeks to reading the PPP tea leaves as they drop from the SBA’s website. Corporate businesses own some equity in the retirement plan in 2019 but in! 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