Oct. 2, 2020 (Courtesy of the Jacksonville Business Journal)
New guidance from the Small Business Administration changes the compensation limits for certain Paycheck Protection Program borrowers who are considered owner-employees.
The federal agency released a new rule for the Covid-19 relief program that says its compensation guidelines for borrowers with this designation apply only to those owner-employees who have at least a 5% stake in a C- or S-Corporation. The reason for the change, the SBA stated, is “to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.”
For owner-employees who hold less than a 5% stake in their company, the cap on their compensation with PPP proceeds is subject to the rules for employees, rather than the cap for owners. Previous SBA guidance has shown that to qualify for full forgiveness, the cap is $15,384.62 for employees and owners of businesses using an eight-week covered period.
The cap is $46,154 for employees of those using a 24-week covered period. Before the SBA issued the new rule this week, owner-employees using the longer period were subject to a lower ceiling of up to 20.83% of their 2019 employee cash compensation.
The limit for all compensation calculations is an annualized salary of $100,000.
Terry Hoover, a partner at accounting firm Wipfli LLP, said he expects the new guidance to be more impactful for borrowers using the shorter covered period.
“With the ability to extend out for as long as 24 weeks, it probably becomes less important for some,” Hoover said.
The role of the owner-employee appeared to emerge in relation to the PPP in May, when the SBA issued a rule about the cap on loan forgiveness available to certain borrowers’ payroll compensation: owner-employees and self-employed individuals.
In that case, the rule also made reference to general partners, who are not mentioned in the guidance related to the stake a shareholder owns. As a result, partners remain limited to their previously established cap, Hoover said. According to the SBA, the cap for general partners is 20.83% of their 2019 net earnings from self-employment.
Just how many PPP borrowers will be affected by the change is unknown, said Husch Blackwell LLP partner Jessica Zeratsky. Owner-employees who hold a stake that small may not have earned enough to approach the limit to begin with. She said the degree to which businesses might see additional forgiveness will be on a case-by-case basis.“It’s going to be so specific to the individual and the borrower that is at play, and how the numbers and how their compensation works out,” Zeratsky said.
As PPP borrowers navigate the forgiveness process, she said they are waiting for answers from lawmakers about whether automatic forgiveness for certain loan values will be part of any forthcoming stimulus packages.
Some lenders have said they are waiting to submit forgiveness applications until those decisions are made. The SBA opened a portal to submit those forms Aug. 10. This week, the agency declined to comment on how many applications have been submitted so far, stating only that lenders find the platform user-friendly.
At the program’s close Aug. 8, the SBA reported it guaranteed more than $525 billion in forgivable loans for 5.2 million businesses.