The SBA just issued guidance on how the PPP loans apply to self-employed. As a part of this guidance they completely changed the way the program applies to partners in partnerships. Under this guidance, the loans based on the income that partners receive from a partnership must be included in the loan at the partnership level, not at the partner level. It is our understanding that the SBA will soon exhaust the funds that Congress allotted to the PPP loan program. This means that partnerships have a very short time frame to apply for the loans to obtain the financing for their partners. In addition, if a partnership has already applied for a loan based on the wages paid to employees, it should investigate whether or not it can or should amend its loan application.
Following are the key items for these loans for partnerships:
- Each business (including partnerships) is only eligible for one PPP loan. If the partnership has already received its PPP loan, it is too late to include the partnership income of the partners in the loan. The partnership income of the partners can still be included in the calculation of the loan forgiveness amount.
- All the reports we have received indicate that the SBA is quickly exhausting their funding for the PPP loan program. Our expectation is that if a business applies for a loan under the program after tomorrow, it will be unlikely to receive a loan unless Congress increases funding for the program. If the partners of a partnership have already applied for PPP loans on their own behalf but the partnership has not applied, the partnership should apply for a loan immediately to maximize the chances of having the loan funded.
- If a partnership has already applied for a loan but it has not yet funded, that partnership faces a difficult decision of whether or not to attempt to amend the loan application. If the application is not amended, the partnership loses the ability to receive funds based on the income of the partners. However, amending the application could slow the loan process enough that the program depletes its funding before the loan is granted. The partnership should consider where their loan is in the loan process as well as the what proportion of the total possible loan would be based on the partner income.
- The SBA guidance did not include any guidance on how to calculate the income of a partner from the partnership. However, it did include details for how an individual should calculate their eligible loan amount from the Schedule C on their tax return. Based on the Schedule C guidance, the following calculation seems appropriate for each partner (losses are subtractions). Each partner’s total must be limited to $100,000. The partnership would add the amount for each of its partners to the total payroll costs based on employees.
- Line 1 ordinary business income (loss)
- Plus Line 2 Net rental real estate income (loss)
- Plus Line 3 Other net rental income (loss)
- Plus Line 4 Guaranteed payments for services
- Plus Line 11 Other income (loss)
- Less Line 12 Section 179 deduction
- Less Line 13 Other deductions
- The total must be limited to $100,000
- Guaranteed payments for capital are unclear. Since they are economically equivalent to interest income, we have excluded them from the calculation.
We will send out a newsletter later describing the other information in the guidance as well as a more detailed analysis for calculating the amount of loan forgiveness under the program.