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Anchin Law Firms Services Group Update

Anchin AlertApril 16, 2020Russell B. Shinsky, Co-Managing Partner & Law Firm Group Leader and Steven D. Lando, Partner & Law Firm Group Tax Leader

Anchin Law Firms Services Group Update

SBA Issues Additional Guidance on Eligibility Criteria for Partners & Self-Employed Individuals

There are several updates to guidance on the PPP Loan Program that law firms should take note of.

Late Tuesday, the Treasury Department issued its third formal Interim Final Rule related to the Paycheck Protection Program (PPP) Loan Program created by the CARES Act.  In this Rule, the SBA has waived the comment period and the normal 30-day delayed effective date, making this Rule effective immediately.  This latest Interim Final Rule clarifies which borrowers are considered self-employed, and very importantly, distinguishes active partners in a partnership from self-employed individuals reporting their income and expenses on a Schedule C with their personal tax returns. Borrowers will need to carefully evaluate direction from the CARES Act, the Interim Final Rules, the Treasury Department’s FAQ, and the Loan Application Instructions to determine the positions that best fits their circumstances.

To assist you, we are providing several key updates related to self-employed individuals:

Partners in a partnership, whose income is categorized as self-employment income on their Schedule K-1 may not submit a separate PPP loan application as a self-employed individual. Instead, the self-employment income of active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by, or on behalf of, the partnership.

They have clarified that eligible wage compensation, capped at $100,000 per employee on an annualized basis, is specifically capped at exactly 8/52 of $100,000 for the computation of forgiveness during the 8-week benefit period.  Each employee or partner who earns more than $100,000 per annum, will count as $15,385 of eligible compensation when computing the amount of PPP loan eligible for forgiveness, plus related covered benefits for employees that qualify as Payroll Costs under the Act.

For self-employed individuals who file a Schedule C for their business as part of their individual tax return, their own compensation will be based on the net profit reported on their 2019 Schedule C, capped at $100,000 per annum.  For the purpose of loan forgiveness, they will be eligible for exactly 8/52 of this same 2019 net profit.  So, a Schedule C borrower with no employees will be eligible for a PPP loan of 2.5 x $100,000 / 12 = $20,833. This same borrower will be eligible for loan forgiveness based on their compensation of $100,000 x 8 / 52 = $15,385.

This borrower can also add amounts spent during the 8-week period on qualified business rent, interest on mortgages, and utility costs, if any, specific to their business (excluding home office-related expenses).

For those who have already filed an application, the Act indicates that a firm cannot submit more than one application, nor does there appear to be a methodology of amending an existing application. If you have not yet received your funding, you may want to consider contacting your financial institution to see if your application can be rescinded and re-submitted taking the Partner compensation into consideration.

This guidance is the latest in a series of clarifications and changes to prior guidance that has left many applicants frustrated and confused. Those who have already submitted PPP loan applications must carefully weigh the risks versus the benefits of re-submitting their applications amid concerns about how long current funding will last and when additional funding may be approved. We are aware of situations where banks have advised not to attempt rescinding a previously submitted application once a SBA Reference Number was received.

Additionally, consider how the inclusion of partners in the loan calculation would affect your total headcount as well as the 500 employee limit.

Anchin’s Law Firm Group is dedicated to the unique needs of law firms. Along with Anchin’s COVID-19 Resource Team, we continue to monitor the PPP Loan Program rules. Please contact your Anchin Law Firm Relationship Partner for more information or contact us at COVID19@Anchin.com. Additional updates can be found at our Anchin COVID-19 Update Center.

Disclaimer: Please note this is based on the information that is currently available and is subject to change.

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