[Updated] Partner Compensation and CARES PPP Loans: What You Need to Know
Disclaimer: This information was correct at the time of publication; however, new guidance from government agencies may be issued at any time, causing some or all of this information to change. Please visit our COVID-19 Business Strategy Hub for the latest news and ensure you are subscribed here to receive email alerts as they are released. We are working diligently to provide the most current information as it becomes available under our COVID-19 Actionable Insights For Businesses Series.
On May 13, 2020, the SBA issued additional guidance through an Interim Final Rule allowing banks to make an additional PPP loan disbursement to partnerships that did not include partner compensation in their original PPP loan application.
Please read our latest blog regarding the updated guidance: Alert: SBA Allows Partnerships to Increase PPP Loans for Partner Compensation
On April 14, 2020, the Small Business Administration reversed the original guidance under the CARES Act, which indicated that partners should file for 7(a) PPP loans individually.
Please read our latest blog regarding the updated guidance: Urgent Alert: SBA Reverses Course on Partner PPP Loans – Immediate Action Needed
April 6, 2020
One of the more debated topics in the newly established Paycheck Protection Program (PPP) is the treatment of partner compensation, whether in the form of guaranteed payments or distributions. Specifically, the question is whether guaranteed payments or distributions are treated as “payroll costs” as defined by the CARES Act.
Under Section 1102(a)(1)(B) of the CARES Act, payroll costs are defined and divided into two categories:
1. 1102(a)(1)(viii)(I)(aa) - "compensation with respect to employees" and
2. 1102(a)(1)(viii)(I)(bb) - "sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment."
In short, partners who receive compensation through guaranteed payments and/or distributions are not treated as employees as defined in (aa), but rather as self-employed individuals as defined in (bb). For partnerships, this means that any 7(a)/PPP loan application should include only non-partner payroll. Partners, in their capacity as self-employed individuals, would apply for loans individually beginning April 10, 2020.
While this is not the easiest or most efficient answer for partnerships and their partners, banks have followed this treatment in the first stage of loan applications. In order to get loan approval, and more importantly, loan forgiveness for qualifying costs spent during the covered period, partnerships and partners should apply for these loans separately.
If you need help with your 7(a) loan, the Moore Colson can assist with the following:
- Calculating the 7(a) loan amount
- Helping your business apply for the 7(a) loan
- Calculating the forgiveness amount
- Assisting with the forgiveness application
- Helping with short and long-term cash flow projections
- Helping calculate the credits under FFCRA and CARES Act
Please click here to contact us or call us at 770-989-0028 if you need help.
For more information on the 7(a)/PPP loans, refer to our previous blogs:
- April 3, 2020 | Alert: SBA Releases New Details on 7(a) Loans – What You Need to Know
- April 1, 2020 | Urgent Action Needed: Banks begin taking SBA 7(a) loan applications on 4/3/2020
- April 1, 2020 | CARES Act Paycheck Protection Program 7(a) Loans – What You Need to Know
Andy Starnes, CPA, is a Partner and Tax Services Practice Leader Moore Colson. Andy’s specialties include corporate tax compliance and planning, business consulting, and multi-generational planning with a focus on the construction, professional services and staffing industries.
