There’s new information on the Paycheck Protection Program (PPP) loan for partnerships and S or C corporations. Entity-specific PPP loan forgiveness rules now apply to you as an owner-worker in the business. The government puts you, as owner-worker, in a separate “owner-employee” category to limit your business’s PPP benefits. The rules do not apply to regular rank-and-file employees, only owner-employees.
There are four types of owner-employees:
- General partners in partnerships
- S corporation shareholder-employees
- C corporation shareholder-employees
- Form 1040, Schedule C filers (e.g., the self-employed, sole proprietors, 1099 recipients, single-member LLCs, and husband and wife LLCs treated as single-member LLCs) See our separate story for No. 4.
If you own all or part of your business and work in the business, you fall into one of the four categories. 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.
The PPP loan forgiveness begins for general partners at the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. You then take the lesser of the amount determined above or $100,000, divide by 12, and multiply by 2.5 to find the loan amount. With this calculation, the maximum loan is $20,833. The maximum forgiveness attributable due to the partner’s self-employment income is
- $15,385 if the partnership obtained its loan before June 5, 2020, and elected the eight-week regime, or
- $20,833 if the partnership is under the 24-week program.
Note: Under the 24-week program, the partnership with no employees does not need to spend any amounts on interest, rent, or utilities to obtain full forgiveness. It can obtain full forgiveness in 11 weeks using the calculated self-employment income of up to $20,833 for each partner.
As with any owner-employee, the PPP loan and its forgiveness for “compensation” is capped at $15,385 under the eight-week covered period and $20,833 under the 24-week covered period.
Reminder: The $20,833 cap is based on the maximum defined compensation of $100,000 divided by 12 and then multiplied by 2.5.
Under the 24-week program, the S corporation whose only employee is an owner-employee obtains full loan forgiveness after 11 weeks when using the 24-week covered period without spending anything for interest, rent, or utilities. If the S corporation with no employees other than the owner-employee elects the eight-week covered period, the corporation has to spend money on interest, rent, and utilities to rise above the compensation cap and create full forgiveness.
The Paycheck Protection Program Flexibility Act of 2020 created a new statutory 60% payroll rule that can make it easier to qualify for full forgiveness with payments for interest, rent, and utilities when electing the eight-week covered period. 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.
Example. You operate your solo business as an S corporation. Your 2019 W-2 compensation of $68,000 included $18,000 for medical insurance. Your payroll cost for the PPP loan and its forgiveness includes the full $68,000 plus what the S corporation paid into your retirement plan and to the state for unemployment insurance. The total of these amounts is capped at $100,000, which creates the $20,833 maximum loan amount as explained.
C corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.
Example. You operate your business as a C corporation where you are the only employee. In 2019, the corporation paid you a salary of $60,000, contributed $12,000 to your retirement plan, paid $20,000 for your family’s medical insurance, and paid $350 to the state for unemployment insurance.
Your corporation has $92,350 in qualifying payroll costs. Your loan and forgiveness are capped at $19,240 ($92,350 ÷ 12 x 2.5).
Owners of Multiple Businesses – Caution
If you have ownership interests in more than one business, you need to consider that the owner-employee loan maximums apply to all your businesses. The new interim final rule puts the $15,385 or $20,833 deemed compensation cap on the loan forgiveness for the defined owner-employee, but contains no guidance on how to allocate or otherwise deal with the caps when you have ownership interests in multiple businesses.
Example. You operate an S corporation and a proprietorship. You receive your PPP loan on June 17. The cap on your combined S corporation and proprietorship loan forgiveness attributable to (a) your employment in the S corporation and (b) your profits from the proprietorship is $20,833.
We know you can obtain loan forgiveness for up to $20,833, but there is no guidance on how you would allocate the forgiveness between the S corporation and proprietorship. Perhaps by the time you apply for PPP loan forgiveness, we will have some direction.