What are the rules for partnerships to participate in the new round of PPP under the new COVID-19 relief bill passed on December 27th, 2020? That’s what we are going to address in this article.
Under the CARES Act, income from partnership was not considered self-employment income for applying PPP loans. Partnerships could apply loans for payroll costs related to their employees. The New Bill has widened the scope of business entities covered and included partnership income eligible for PPP loans. However, one mandatory requirement under the New Bill is the business entity must be in operation on February 15th, 2020 in order to be eligible to apply for the new round of PPP loan.
As you may know, the maximum amount a borrower can get on a PPP loan is based on the monthly payroll cost. Therefore, let’s list out the method for calculating the maximum loan in case of a partnership.
Step 1. Calculate payroll cost for partnership by adding the following:
- 2019 Schedule K-1 (IRS Form 1065) Net earnings from self-employment of individual U.S. based general partners that are subject to self-employment tax, computed from box 14a (reduced by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties) multiplied by 0.9235, up to $100,000 per partner;
- Add all gross wages and tips paid to any employees. Include employee contributions for health insurance. Cap the combined total compensation of any individual employee to $100,000 if necessary and exclude any employees who do not live in the US;
- Add 2019 employer contributions for employee health insurance and employee retirement plans (IRS Form 1065 line 18), if applicable;
- Add 2019 state and local payroll taxes. Federal taxes are excluded.
Step 2: Calculate the average monthly payroll cost. Divided payroll calculated in step 1 by 12.
Step 3: Multiply the average monthly payroll costs from Step 2 by 2.5. or 3.5 (if hotel or restaurant)
We at A&C recommend that all the borrowers keep supporting documentations for the payroll amount calculated as above. In case of a partnership, supporting documentations includes 2019 K-1(1065), Payroll returns form 941 and state quarterly wage unemployment insurance tax reporting along with records of any retirement or health insurance contributions. The payroll documentation must cover February 15th, 2020 in the pay period if the partnership had employees. In case there are no employees, bank statements or books of record establishing the partnership was in operation on February 15, 2020 must be provided.
If you have questions regarding this topic, please reach out to us at (469) 467 – 4660, or firstname.lastname@example.org.