CARES Act: Paycheck Protection Program Loans - Partnerships

CARES Act: Paycheck Protection Program Loans - Partnerships

*NOTE: This Act is currently evolving and has daily changes. This article was written with the most current information as of 04-15-2020.

Introduction

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is working to help alleviate the strain many businesses and individuals have under the current circumstances by providing $376 billion in relief for American workers and small businesses. There are many parts to the CARES Act. If you are running a business, particularly with employees, it is highly recommended that you visit the U.S. Small Business Administration website www.sba.gov. Also, you may want to speak with your attorney or human relations professional to discuss the requirements. Of the many different funding/loan programs and employee protection guidelines, this article is going to look specifically at one particular loan: Paycheck Protection Program (PPP) Loans. In particular, this is a follow up to my previous article to provide further information on guidelines announced for partnerships and Schedule C’s.

Paycheck Protection Program Loan – Partnerships & Schedule C’s

For those of you who file a Schedule C, new partnership loan filing guidance has become available. The first point of interest is if you are a partner in a partnership, you may not submit a separate PPP loan application for yourself as a self-employed individual. The correct way to handle the self-employment income of an active general partner is to report it as payroll cost. Again the same rules apply for the limit as in my first article, $100,000 annualized by employee. If a partner is making $140,000 annually, the payroll cost will be capped at the limit of $100,000 on the loan application. The Administrator of the Act states that limiting a partnership and its partners to one PPP loan is necessary to help ensure that as many eligible borrowers as possible obtain PPP loans before the deadline of June 30, 2020. The loan proceeds are to be used for owner compensation replacement, employee payroll costs, rent on lease agreements in force before February 15, 2020, utilities, mortgage interest, interest payments on any other debt obligation that were incurred before February 15, 2020, and refinancing an SBA EIDL loan made between January 31, 2020, and April 3, 2020. The 75% rule still applies for loan forgiveness.

PPP Loan Borrowing Calculation - Partnerships

It is a four-step process to calculate the maximum loan amount.

  1. Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount. If this amount is over $100,000, reduce it to $100,000. If the amount is zero or less, you are not eligible for a PPP loan.
  2. Calculate the average monthly net profit amount
    1. Divide step 1 by 12
  3. Multiply the average monthly net profit amount from step 2 by 2.5
  4. Add the outstanding amount of any Economic Injury Disaster Loan made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan.

For those that have yet to file a Schedule C for 2019, you must provide the 2019 Form 1040 Schedule C with your PPP loan application. Also, you will need a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed. A 2020 invoice, bank statement, or book of record will be needed to establish you were in operation on or around February 15, 2020.

PPP Loan Borrowing Calculation – Partnerships with Employees

If you have employees, the calculation for the maximum loan is similar to above.

  1. Compute 2019 payroll by adding the following
    1. Find your 2019 IRS Form 1040 Schedule C line 31 net profit amount. If this amount is over $100,000, reduce it to $100,000. If the amount is zero or less, you are not eligible for a PPP loan.
    2. 2019 gross wages and tips paid to your employees whose principal place of residence is the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c – column 1) from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips; subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States.
    3. 2019 employer health insurance contributions (Form 1040 Schedule C line 14 health insurance component), retirement contributions (Form 1040 Schedule C line 19), and state and local taxes assessed on employee compensation.
  2. Calculate the average monthly total
    1. Divide Step 1 by 12
  3. Multiply the average monthly amount from step 2 by 2.5
  4. Add the outstanding amount of any EIDL made between January 31, 2020, and April 3, 2020, that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan.