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New PPP Rule Lays Out Rules for Owner-Employee Forgiveness

Posted on June 24, 2020

The latest round of guidance on the new small business loan program sheds some light on what the government meant by the phrase “owner-employee,” which earlier rules left undefined.

Under the interim final rule released June 22, owner-employees of C corporations are capped by the amount of their 2019 employee cash compensation and employer retirement and health contributions made on their behalf.

For S corporation owners, the rule points out that those owner-employees are capped by the amount of their 2019 cash compensation and employer retirement contributions made on their behalf. However, health insurance contributions made by the employer for S corporation owner-employees can’t be added separately because those payments are included in their employee cash compensation, the rule clarifies.

That S corporation shareholders are owner-employees under the Paycheck Protection Program (PPP) rules partially clears up a gray area. In an earlier rule, the Small Business Administration included the phrase “owner-employee” without defining it, leaving many to wonder how that would apply to loan forgiveness.

Edward K. Zollars of Thomas, Zollars & Lynch Ltd. said he thought the phrase had to cover corporate shareholders, but that general partners and sole proprietors were excluded from that definition.

“Some professionals believed that since the only place it appears the term is used in the [code] was for qualified retirement plans — where it does bring in partners and the self-employed — that corporate shareholders weren’t covered,” Zollars continued. “But it seemed strange to me that the SBA would have used such an otherwise obscure reference without calling it out.”

But some practitioners nonetheless believed S corporation shareholders shouldn’t count as owner-employees. Over time, the original forgiveness application form and later rules chipped away at that concern by making it clear owner-employees were treated differently from partners and sole proprietors, Zollars said.

With this latest rule, however, the government made it clear that S corporation shareholders are owner-employees, he added.

Christopher J. Wittich of Boyum & Barenscheer PLLP said that it’s helpful to finally get some clarity on what counts as a S corporation owner and how it differs from the treatment of a Schedule C filer and partnership owner. He added that it generally makes sense that because health insurance is included in the W-2 for the S corporation owner, it should be treated as a payroll cost and not separately as insurance.

The PPP, created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), generally provides loans to businesses with fewer than 500 employees that are forgiven on a tax-free basis if a specified portion of the loans is spent on payroll costs over a covered period.

Initially, the SBA and Treasury said that for a loan to be forgiven tax free, at least 75 percent of it must be used on payroll costs. But Congress changed that by enacting the Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142), which extended the covered period from eight weeks to 24 weeks and reduced to 60 percent the amount required to be spent on payroll to qualify for loan forgiveness.

Guidance from the SBA and Treasury has been sporadically released since the PPP was created. Recent rules enacting the legislative changes to the program provide insight on the amounts of payroll costs that could be forgiven depending on whether the employer is subject to an eight- or 24-week covered period. The most recent interim rule incorporated those dollar amounts of compensation that can be forgiven, along with the caps of owner-employees depending on the type of entity that received the loan.

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