Alston & Bird LLP and Aflac
The Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), extended the covered period for determining the amount of PPP loan forgiveness to 24 weeks after the date of loan disbursement, but no later than Dec. 31, 2020. Borrowers that received a loan before June 5, 2020, may elect to use a covered period of 8 weeks from the date of loan disbursement rather than 24 weeks. The Small Business Administration (SBA) has issued updated guidance on the compensation limit for PPP loan forgiveness purposes, including how the limit applies depending on whether the borrower is using an 8-week covered period or a 24- week covered period. This article provides a high-level overview of the compensation limit as applied to owner-employees, focusing on two of the most common small business types, independent contractors and S corporations. Information on other changes made by the Flexibility Act is in our prior PPP Advisory.
Calculation of Loan Forgiveness Amount for Independent Contractors and Other Business Owners
In general, the maximum amount of compensation that can be taken into account per employee for PPP loan forgiveness is limited to $100,000, which is pro-rated based on the covered period. In calculating the maximum compensation limit, business owners (“owner-employees”) are subject to restrictions that do not apply to other employees. The precise rules for owner-employees depend on how the business is organized.
For independent contractors, sole proprietors and other self-employed individuals that report their business income for federal tax purposes using a Schedule C:
For S-corporation owner-employees:
The different rules that apply for other business types, such as C corporations and partnerships, are provided in SBA guidance.
The details of the PPP continue to evolve as new guidance is issued and legislative changes are enacted. New rules may impact borrowers differently, depending on the type of business and the particular circumstances. As of Aug. 8, 2020, the PPP is closed to new loans. Congress is considering further changes to the program, including possibly extending the program as well as easing certain current requirements. Be sure to check with your lender and the SBA website for the most recent information.
The information above is provided for general informational purposes and is not provided as tax or legal advice for any person or for any specific situation. Employers and employees and other individuals should consult their own tax or legal advisers about their situation.