The Small Business Administration (SBA) has provided generally business-friendly interpretations of the CARES Act provisions for forgiveness of paycheck protection program (PPP) loans, as we discussed in this article. Notwithstanding their generally sound and borrower-friendly guidance, there is one area in which the SBA has adopted a different and novel approach: a special, more restrictive, interpretation of payroll costs for employee-owners of the businesses that received PPP loans. Special treatment for employee-owners was suggested in the loan forgiveness application and outlined in its May 22 Interim Final Rule (IFR). Although we applaud SBA efforts to prevent abuse, we fear this new undefined category of “employee-owners” will create more confusion than it seems to be worth.

In an earlier IFR published in the Federal Register on April 20, the SBA (and Treasury Department) addressed three topics, the first of which concerned PPP loans received by businesses of self-employed owners – that is Schedule C filers (sole proprietors) and partners. In that IFR, the SBA confirmed that PPP loans could include “owner compensation replacement.” However, the IFR also included a new cap on forgiveness “calculated based on 2019 net profit * * *, with forgiveness of such amounts limited to eight weeks’ worth (8/52) of 2019 net profit.” In this discussion of forgiveness, the IFR referred to “owners.” The context indicated that “owners” referred to sole proprietors and partners. The topic of the questions answered in this portion of the IFR was labeled “Individuals with Self-Employment Income Who File a Form 1040 Schedule C,” (emphasis added). The earlier IFR never used the term “employee-owners.”

The loan forgiveness application incorporates the 8/52 limitation described in the April 20 IFR in line 9 of the PPP Schedule A. However, the SBA, without explanation, now subjects a new type of owner to the limitation invented in the April 20 IFR: “employee-owners.” That is, while the April 20 IFR only discussed Schedule C files and general partners, Line 9 of PPP Schedule A is for “owner-employees, a self-employed individual, or general partners.” There is no explanation in the application of when an employee falls into this new category of “owner-employee” so we initially thought that the SBA was using some sort of shorthand to pick up all sole proprietors and “1099 contractors.” To read more, click here.

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