INSIGHT: “Owner-Employee” Confusion Remains – How are Owner-Employees Treated for FTE Rate in a PPP Lending Application?
For reasons known only to the Small Business Administration (SBA), it continues to attempt to treat “owner-employees” like sole proprietorships and partners for the purposes of the Paycheck Protection Program (PPP) lending. Despite recent efforts by the SBA to mitigate the impact of this flawed policy, unintended consequences continue to emerge, including a glitch in the PPP loan application form related to the RTD rate.
We were criticisml the restrictions invented by the SBA on the waiver of PPP loans for “owner employees” as the SBA seeks to extend the waiver restrictions applicable to sole proprietorships and partners to owner employees. However, as we noted in this one items, the PPP loan regime treats worker-owners differently than sole proprietorships and shareholders in many ways, including the ability of sole proprietorships and shareholders to receive PPP loan proceeds as tax-free compensation. Such substantial differences undermine the logic of extending the treatment of sole proprietorships and shareholders to owner-workers.
As we described in May, in 14. Provisional final rule (IFR) for PPP loans, the SBA has the limitations it (but not Congress) chose to impose PPP loan on this undefined category of corporate workers. (Although the SBA has still not given a definition of the term “owner-employee”, it appears in general that the term refers to employee shareholders of C companies and S companies, including LLCs, that are taxed as such At least so far neither indirect ownership nor the allocation rules apply.)
By doing 18th IFR and the instructions for regular PPP lending use, the SBA limited the forgivable cash compensation paid to a business owner / employee over a covered period of 24 weeks to $ 20,833 instead of the $ 46,154 applicable to other employees. In one recently items, we applauded the SBA for providing one de minimis Ownership threshold (5%) for that particular ceiling. (We think the threshold is too low, but it limits the maximum impact of the special cap to $ 506,420 (20 * ($ 46,154-20,833)) – excluding the de minimis Threshold, a company with 100 employees with nominal share ownership could lose over $ 2.5 million in loan forgiveness that it reasonably expected.) Though the de minimis Threshold relieves a mistake in the owner-employee restriction, others remain – for example the influence of owner-employees on the FTE rate.
No company with a PPP loan has reached the 24-week deadline for a PPP loan waiver. Although the SBA has stated that companies can apply for remission before the 24-week covered period expires, we have described it here items how it is practically impossible for a company to apply for remission before the 24-week period expires. But with the opening of the PPP loan by the SBA “Award portal“For banks and banks that are expected to start accepting PPP loan waiver applications soon (if they have not already done so), companies are starting to compile draft PPP loan waiver applications. For the regular application for waiver, this requires calculating the company’s FTE rate.
As a reminder, the PPP loan waiver is limited to a minimum of three amounts:
1. The nominal amount of the PPP loan.
2. Wages and salaries paid or incurred during the Covered Period divided by 60 percent.
3. The sum of excusable payments over the covered period minus the amount for the statutory reduction in forgiveness due to a reduction in compensation, all multiplied by the company’s FTE rate.
Like us before described, the SBA’s favorable interpretations of whether a company has cut an employee’s pay and the calculation of the FTE ratio will generally prevent these provisions from reducing the PPP loan waiver. Nonetheless, the application requires calculations for both, so companies have yet to do the calculations. The FTE rate is a fraction, where the numerator is the average weekly FTE of each employee during the covered period and the denominator is the average weekly FTE of each employee during the “reference period” (usually 15 February 2019 to 30 June), 2019 or January 1, 2020 to February 29, 2020, depending on the company’s choice).
Conceptually, the FTE rate is relatively simple (although there are some complications as none of the reference periods have an exact number of weeks, unlike the period covered). Of course, the devil is in the details. Use these details to calculate the FTE ratio in the forgiveness request:
- The numerator of the FTE rate (average weekly FTE of each employee during the covered period) is given in Table 1 and Table 2 of the PPP scheme A worksheet. Table 1 lists the information, including the average FTEs during the period covered, for employees who received annual pay of $ 100,000 or less for all pay periods in 2019 who received annual pay greater than $ 100,000 for all pay periods received in 2019. It is important that the instructions provide for the following: “Do not involve independent contractors, Owner-Employee“Self-employed or partner” in either Table 1 or Table 2. (emphasis added.) Therefore, the application obviously excludes the average weekly FTE of self-employed from the numerator of the FTE rate.
- The denominator of the FTE ratio (average weekly FTE of each employee during the reference period) is given in line 11 of Annex A to PPP. While the instructions for line 11 provide limited guidance, they do indicate that the denominator includes “any employee” with no exclusions. Accordingly, some might conclude that the denominator includes the average weekly FTEs of the owner employees, even though the same people are excluded from the numerator. (Since sole proprietorships and shareholders are not employees, they would be excluded from the denominator.)
With such a reading, there is a discrepancy in which owner-employees are excluded from the numerator of the FTE rate, but are included in the denominator. But mechanically following the request for forgiveness leads to an unfair outcome that has neither legal basis nor logical justification. Congress never mentioned “owner employees” in the CARES Act or PPPFA, let alone calculating an FTE rate that penalizes companies for having owner employees. In addition, the law defines the numerator of the FTE rate as “the average number of full-time equivalents”. Employee per month employed by the beneficiary during the Covered Period. “CARES Act Section 1106 (d) (2) (A) (i) (emphasis added).
Businesses can find cold comfort with this detailed explanation of a mistake in the PPP loan waiver application. Instead, companies with owner-managed employees who fill out the application understandably want a solution that solves this problem. The SBA must provide instructions, including a correction of the application and instructions. In the meantime, companies should keep the following in mind:
1. Assume that employees with a stake below the 5% threshold are not “owner employees”. Under this reasonable interpretation of the de minimis As described above, the company may include these employees in Table 1 or Table 2. Although logical, this interpretation does not follow the literal language of the IFR, which created the threshold that describes the threshold for not applying the “owner-worker compensation rule” to “owner-workers with less than 5% ownership” C or S Corporation. ”Still, it seems unlikely that the SBA would successfully challenge an interpretation or strike a court that leads to a logical and reasonable result. While this approach should help many requests for forgiveness, it does not solve the problem for companies with owner employees who own more than 5% of the company.
2. Include employees with owners in Table 1 and Table 2, respectively, but add $ 0 for cash compensation. The application already has a specific place (line 9 of PPP scheme A) for compensation to owners, including owner-workers. In addition, the SBA has likely excluded owner-managed workers from Tables 1 and 2 to avoid double counting this remuneration. The inclusion of the average weekly FTEs of the employee-owners in Table 1 or Table 2 also leads to the logically appropriate result. However, listing $ 0 in compensation may raise questions or create problems, especially for companies that submit claims electronically through a portal created by the bank.
3. Exclusion of owner employees from the denominator of the FTE quota. This would correspond to the general policy of the SBA to treat employee-owners as sole proprietors and shareholders. However, it contradicts the law that defines the denominator of the FTE rate as “the average number of full-time equivalents” Employee per month that was employed by the beneficiary during the reference period. CARES Act Section 1106 (d) (2) (A) (ii) (I) (aa), (I) (bb) and (II) (emphasis added).
The SBA went beyond its legal powers when it introduced the employee-owner compensation scheme and limited the forgivable compensation to worker-owner. Then the Congress extended the covered period from 8 to 24 weeks and the SBA sua spontaneously decided the rule we created earlier was too generous, reducing forgiveness by as much as $ 25,321 per employee. The SBA recognized the mistake on their way and then asked de minimis Relief for owner employees with less than 5% ownership. In the further processing of the request for forgiveness, we find that the SBA’s treatment of the owner-managed employees also leads to an intellectually unjustified result for the calculation of the FTE rate. We hope the SBA will fix this problem that caused them. Otherwise, affected companies may need to take legal action to get the right outcome.
This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Lewis M. Horowitz is Chairman of the Shareholders and Taxes Team at Lane Powell.
Eric Kodesch is a member of Lane Powell and advises clients on a wide range of state income tax and state and local tax matters in both transactional and litigation.