Late on April 16, 2020, the SBA announced that its Paycheck Protection Program (PPP) was out of funding and the agency would not be accepting any more applications for the $349 billion program. This left many small business owners – including medical practices and related health care companies – frustrated and disappointed as the logjam of applications meant that many such businesses were unable to secure funding. Many hope that Congress will replenish the PPP through an additional round of funding – if this happens, there are potential opportunities for those in the health care industry as highlighted below.
Updating the Existing Application to Properly Account for Self-Employed Income
One of the most frequently asked questions during the initial application process by practices and other health care-related businesses structured as partnerships or LLCs was whether the income generated by their owners in providing services to the business could be appropriately included in the calculation of payroll costs. Given the initial uncertainty on this issue, many practices excluded this income from their initial calculations which, at least in some cases, significantly reduced the amount of their requested loan.
Prior to the halt in funding, the SBA published guidance on April 14, 2020, further clarifying loan eligibility requirements for self-employed individuals under the PPP. This is significant now because this guidance provides confirmation that income paid to owners in a partnership or LLC taxed as a partnership can be included as payroll costs for purposes of calculating the eligible PPP loan amount for the partnership/LLC (subject to the $100,000 annualized cap for eligible compensation – more on this below). In light of this clarification, for those LLCs and partnerships still waiting on funding, there is potentially an opportunity to re-assess the initial application and determine whether the requested loan amount should be revised to include any owner-related income that was previously excluded. Depending on the number of owners, this could result in a significant increase in the requested loan amount.
If your practice falls into this category, we would recommend contacting your bank or lender to see whether it is possible to now amend your application[1] for this purpose as the financial benefits could be significant.
Submitting New Applications for Individually Earned Self-Employment Income
It is not just practices that can benefit from the delayed funding. Many physicians and other providers individually receive income, and in some cases substantial income, outside the “standard” employment or ownership capacity. This can include everything from medical director arrangements to supervision agreements, teaching and speaking engagements, and call coverage group participation – as many of you know, the list is extensive. In the overwhelming majority of these instances, the providers are treated as independent contractors and, therefore, compensated through Form 1099 arrangements. This is potentially significant under the PPP loan program for the reasons described below.
Per the current SBA guidance, sole proprietors, sole members of LLCs, and independent contractors can apply for loan assistance on an individual basis. This raises the question, then, can a physician or other provider performing independent contractor services for a third party other than his/her practice entity file for PPP loan relief with respect to income earned under these arrangements? We believe the short answer is yes (subject to the requirements below).
While the most recent SBA guidance does not directly address the submission by a physician for funds derived through independent contractor services that are essentially “secondary” to the provider’s main line of work, we believe that such ancillary income falls squarely within the category of self-employment income that is intended to be covered by the relief provisions of the PPP. Specifically, the income generated from such independent contractor services seems no different from a statutory perspective than income that is generated by sole proprietors and individual members of single-member LLCs, two categories that are clearly covered on an individual basis under the PPP guidance.
Moreover, the guidance makes clear that the entity for whom the independent contractor services are generated cannot submit these amounts for loan reimbursement. So, if the individual physician providing the services is also excluded from applying for loan relief, then these amounts effectively fall outside the contours of the PPP assistance. Given that these amounts are often critical components of a physician’s overall compensation base, this seems an inappropriate result given the stated intention of the relief program. Therefore, we believe it is certainly worth a physician’s time and effort to pursue an application process if these amounts are significant.
Note that if independent contractor income is eligible for loan subsidization, the underlying amount will be calculated using the same methodology that is applied to income generated in the practice setting process (see previous Client Alert[2]) and will require the provider to submit appropriate documentation to support the claims (which can be anything from the applicant’s Form 1099 for 2019 to personal bank statements or tax returns). Depending on the amount of income that a provider earns through these types of “outside arrangements,” the recovery could be fairly substantial – up to $20,833 for the period in question if the total amount of independent contractor income for 2019 exceeded $100,000. Note, however, that under the forgiveness provisions of the PPP, only 75% of the loan amount can be applied to payroll costs; the remaining 25% must be applied to rent, mortgage interest, or utilities. If these additional expenses do not apply to your independent contractor services, then only $15,625 of the potential eligible loan amount is subject to forgiveness. We know that for many of you, patient volumes may be down and third party payments may be delayed or in some instances reduced. We also know that many of your contract partners (hospitals, labs, ODCs, ASCs, universities, etc.) are facing the same economic pressures and, therefore, many previously “stable” payment arrangements are now potentially at risk. While there are numerous relief programs available for health care providers (see Client Alert[3]), pursuing this form of short-term relief is potentially another tool in your toolbox for navigating the oncoming economic downturn that is widely predicted.
[1] Of course, as part of any conversation with your lender, we would recommend also confirming that the processing of any such amendment would not adversely affect your “place in line” with respect to the original application. The answers may be different depending on the lender and, in some cases, could be determined on a case-by-case basis.
[2] See CARES Article – “How do self-employed individuals calculate the maximum PPP loan amount?”
[3] See $100B Relief Article
