The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or) was signed into law March 27, 2020 to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic. The Paycheck Protection Program, a provision in the CARES Act, provides forgivable loans for businesses impacted by the devastating financial impact of the epidemic.
The Paycheck Protection Program Flexibility Act of 2020 (PPPFA) was signed into law on June 5th to expand borrower flexibility and simplify the process to request forgiveness as a result of feedback from lenders and borrowers reporting that the rigidity and uncertainty of the program, as implemented, rendered the loan program an ineffective source of relief.
The Small Business Administration released a 34 page interim final rule (IFR) on June 22, 2020 that offered important clarifications and guidance on the Paycheck Protection Program. The IFR reconciles the changes enacted with the passing of the PPPFA to the original CARES Act legislation and earlier guidance issued by the Administration through various FAQ responses and multiple IFRs.
The IFR codified changes we have previously covered including the expanded maturity period for loans made after 6/5/20 to five years, the increased limit from 25% to 40% for non payroll costs in order to obtain full forgiveness, and the expansion of the covered period from 8 weeks to 24 weeks.
The guidance also reiterates much of what was outlined in the uprevious interim final rules issued before the enactment of the PPPFA and modifies necessary language to reconcile to the terminology and changes enacted with the PPPFA. We provided a detailed overview of this information in a prior post. You can read the post at this LINK.
The guidance also included information and clarity on areas of uncertainty. Two frequently asked questions we have received in previous webinars included if borrower’s could apply for forgiveness before the end of the covered period and clear guidance on the limits of compensation eligible for forgiveness for owner-employees and self-employed individuals. Additional information to consider on those two important areas are detailed below.
Eligibility to apply early for forgiveness – “in-between” covered period is permitted
- Borrowers can apply before the end of the covered period if the borrower has used all the funds for which the borrower is requesting forgiveness.
- CAUTION – If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.
Maximum amount of loan forgiveness for owner-employees and self-employed individuals payroll compensation is outlined in detail below:
| Maximum amount of loan forgiveness available for owner- employees and self-employed individuals’ | |||
| Entity Type | Loan origination before 6/5/20 & electing 8 week period | After 6/5/20 | Notes |
| Schedule C & Schedule F filers | lesser of 8/52 of 2019 compensation or $15,385 | lesser of
2.5 months(2.5/12) of 2019 payroll or $20,833 | For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation. |
| C-Corp Owner-employees | lesser of 8/52 of 2019 compensation or $15,385 plus employer retirement & health insurance contributions | lesser of 2.5 months of compensation (2.5/12) of 2019 compensation or $15,385 + employer retirement & health insurance contributions | |
| S-Corp Owner-employees | lesser of 8/52 of 2019 compensation or $15,385 plus employer retirement | lesser of 2.5 months of 2019 payroll (2.5/12) or $20,833 + employer retirement contributions | S-Corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation |
| General Partners | lesser of 8/52 of 2019 net earnings from self-employment (less 179, unreimbursed partner expenses, and depletion) multiplied by .9235 or $15,385 | lesser of 2.5 months (2.5/12) of 2019 net earnings from self-employment (less 179, unreimbursed partner expenses, and depletion) multiplied by .9235 or $20,833 | For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation. |
Questions:
- Are partnerships required to make distributions to its partners within the covered period in order for eligible payroll costs to be included in the application for forgiveness or is treatment similar to Schedule C “owner compensation replacement”?
- Do the rules above apply in the same manner to members of LLCs taxed as partnerships as they do to “general active partners” in ordinary partnerships?
- If a borrower applies for forgiveness before the end of the covered period, are they still eligible for the 24 week limit of $46,153 per employee?
The PPP application window ends June 30; it has been reported this week that there is an estimated $130 billion still available.
We are in this together,
Brinker Simpson & Company, LLC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice & cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).