The twists and turns in the Paycheck Protection Program (PPP) saga continue this week, leaving many borrowers feeling as though the rug has been pulled out from under them.

Among the latest developments, the Internal Revenue Service (IRS) has issued a ruling that business expenses paid by a PPP loan may not be deducted on an entity’s tax return. The Department of the Treasury (Treasury) continues to press for the return of loan proceeds by entities that it says the PPP was not designed to help. Treasury has also extended the safe harbor deadline for the return of funds to May 14, 2020, and promised that, in the coming days, substantive regulations or guidance will be issued to enable businesses to determine whether they should keep the money they’ve received.

Read on to learn more about these issues.

No Deductions for Expenses Paid with PPP Loan Funds

Ordinarily, if the debt of a business or individual is forgiven, the amount of the forgiven debt must be reported as income on the debtor’s tax return and taxes must be paid accordingly. The Coronavirus Aid, Relief and Economic Security Act (CARES Act),which created the PPP, explicitly provides that forgiven PPP loans will not be included within a borrower’s gross income, and therefore a borrower will not incur income tax liability as a result.

However, a notice issued by the IRS on May 1, 2020 limits the impact of this tax benefit. PPP loan proceeds can only be used to pay rent, utilities, mortgage interest and payroll costs. These expenses are often deductible, and thus reduce an entity’s taxable income. By way of example, if an entity had gross annual income of $200,000 in 2019, but paid $50,000 in deductible expenses, its taxable income would have been $150,000. According to the IRS, this is not so if otherwise deductible expenses are paid with PPP loan proceeds.

What does this mean? Suppose that the same entity described above only has $150,000 in gross annual income for 2020, and acquires a PPP loan for $50,000 which is later forgiven. The forgiven PPP loan is not considered income, and therefore the borrower’s gross taxable income is only $150,000. However, because the expenses paid by the PPP cannot be deducted, the borrower’s taxable income is not reduced by the amount of those expenses and remains at $150,000. If the borrower were able to deduct those expenses, its taxable income would only be $100,000. The end result is that the borrower loses a tax benefit of tens of thousands of dollars, although it gained the benefit of the tax-free PPP loan.

Treasury Secretary Steven Mnuchin has backed the IRS’ ruling, calling it “basically tax 101.” According to Mnuchin, because the PPP loan proceeds are not taxable, it would constitute “double dipping” for companies to deduct expenses that they “didn’t pay for.”

A bipartisan group of senators, including Republican Senator Chuck Grassley, disagree. In a statement, Senator Grassley said, “When we developed and passed the Paycheck Protection Program, our intent was clearly to make sure small businesses had the liquidity and the help they needed to get through these difficult times.Unfortunately, Treasury and the IRS interpreted the law in a way that’s preventing businesses from deducting expenses associated with PPP loans. That’s just the opposite of what we intended and should be fixed.”

In that spirit, on May 6, 2020, this bipartisan group of senators introduced the Small Business Expense Protection Act (SBEPA).  Although the text of the bill is not yet available on the Senate’s website, it has been reported that the legislation nullify the IRS’ ruling and restore the right of borrowers whose PPP loans have been forgiven to deduct expenses paid with loan proceeds on their tax returns.

No matter the outcome, the uncertainty that borrowers are currently facing is a problem in and of itself. With many businesses facing serious decreases in revenue, the ever-changing nature of the rules of play makes financial planning incredibly difficult.

Treasury Extends Safe Harbor, Announces Audits

As we discussed in a previous blog post, a blitz of media coverage about large public companies acquiring PPP loans spurred Treasury and the Small Business Administration (SBA) to update its Frequently Asked Questions document (FAQs) to address the issue. The document notes that applicants are required to certify that “[c]urrent economic uncertainty makes [a PPP] loan request necessary to support [its] ongoing operations….” Applicants cannot make this certification in good faith without assessing whether they have access to other funds that can support their ongoing operations without resulting in significant detriment to the business. As an example, the FAQs note that it is “unlikely” that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.

In acknowledgment of the fact that some borrowers did not have the benefit of this guidance when they acquired their loans, Treasury and SBA instituted a safe harbor period that would allow borrowers to return their PPP funds by May 7, 2020 without penalty. Through updates to the FAQs on May 5, 2020, Treasury and SBA extended the safe harbor period through May 14, 2020, noting that “SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.” As of May 7th, that additional guidance still has not been published.

What are the consequences for a business that cannot substantiate its certification of “necessity,” but does not return its PPP loan during the safe harbor period? According to Secretary Mnuchin, such a business’ loan may not be forgiven and it could even face criminal penalties. And, Mnuchin promises that the government will actively seek to root out false certifications by auditing applicants who received loans larger than $2 million, among others, when forgiveness applications are submitted.

Employee Retention Credit

In what amounts to a consolation prize, on May 6, 2020, the FAQs were updated to state that businesses that return their PPP loans will be entitled to claim the employee retention credit provided for by the CARES Act. This is a refundable tax credit for employers equal to 50% of qualified wages paid to employees after March 12, 2020 and before January 1, 2021, up to a maximum credit per employee of $5,000 for $10,000 in wages paid.


Borrowers who thought that all they had to do was retain or rehire their workers using at least 75% of their PPP loan proceeds may be in for a rude awakening. Some who thought they were receiving “free money” may actually find themselves saddled with debt that they would not have acquired if all requirements had been known from the start. Additionally, some borrowers who made calculations based upon the notion that their business expense deductions would remain intact will, at least for now, need to go back to the drawing board. Although the employee retention credit may provide some relief to these businesses, the magnitude of that benefit is substantially less than the one promised by the PPP as it was initially sold to the public.

There are likely to be legal challenges to SBA’s forthcoming rulings on PPP loan forgiveness, and any attempts to impose civil or criminal liability on borrowers who purportedly did not make the required certification in good faith. Forbes has already written extensively about a potential argument that the FAQs’ requirement that the PPP loan be “necessary” for the borrower to maintain its operations is unconstitutionally vague. There may be other arguments that Treasury’s regulations contravene and are trumped by the text of the CARES Act, or that the changes to those regulations cannot properly be applied to borrowers who acquired loans before they were issued. A lawsuit making similar claims has already been commenced by a California company.

At bottom, these technical arguments and the prospect of winning a fight against the federal government for loan forgiveness are likely to be of little comfort to most small businesses. The average PPP borrower should be on the lookout for the additional guidance that Treasury has promised to issue before the end of the safe harbor period. In the meantime, those entities should start considering whether and to what extent their revenues are down, whether some or all of the business in the pipeline has dried up and, ultimately, whether they would have been able to retain their employees without the PPP loan.

If you need assistance, contact Jessica M. Baquet at (516) 393-8292 or

After about ninety years, New York State has revised its fraudulent conveyance rules. Those who obtain and collect money judgments should be aware of the new, more uniform and clearer standards, reduced timelines, and changes in the burdens of proof. Here are some of the highlights of the new law.

  1. What Law Applies?

New York’s new Uniform Voidable Transaction Act applies to transfers made or obligations incurred after April 4, 2020. The old law applies to transfers which occurred before April 4, 2020. Under the new law, New York law will apply if the individual defendant principally resides in New York at the time of the transfer, or in the case of a defendant which is an organization, such as a corporation, New York law will apply if the organization has its place of business in New York.

  1. What transactions are covered?

The old law covered only “conveyances”, which meant “every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or encumbrance.” The new law is broader and defines “voidable transfers”, as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, license, and creation of a lien or other encumbrance.”

  1. How Far Back Can the Creditor Look For Fraudulent Transfers?

The old law had a generous six year lookback period. Under the new law, there is only a four year lookback with respect to constructively fraudulent transfers or incurred obligations and the later of four years or one year from discovery in the case of intentionally fraudulent transfers. While this is a significant reduction in protection for creditors, it is still better than the lookback period in bankruptcy which is two years from the date of filing of the bankruptcy petition.

Because of the wording of the new law, it seems that the statute of limitations cannot be waived. This remains to be seen, but creditors should be mindful of this when formulating forbearance or other settlement plans.

  1. What Does the Creditor Need to Prove?

The old statute did not assign the burden of proof, but pursuant to case law, the party seeking to set aside the transfer had the burden of proving that the challenged transfer was fraudulent and the defendant had the burden of establishing any defenses to the fraudulent transfer. These rules are now expressly laid out in the new statute. Case law construing the old law applied a preponderance of the evidence (more likely than not) standard for constructive fraudulent conveyance claims and the heightened standard of clear and convincing evidence for intentional fraudulent conveyances. The new law prescribes a preponderance of the evidence standard for both constructive and intentional fraud, which is beneficial to creditors.

The new law preserves the claims of constructive fraud and actual fraud, but changes what has to be proven for each. The new law also adds a provision for insider transactions and does away with the so called “Litigation Defendant Rule”.

(a) Removal of the Litigation Defendant Rule.

The new law removes a provision of the old law which was beneficial to creditors. Under the old law, “[e]very conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for  the plaintiff, the defendant fails to satisfy the judgment.” Under the new law, the debtor’s status as a defendant in pending litigation at the time of the transfer is merely a factor to be considered when determining whether the challenged transfer was made with actual intent to hinder, delay or defraud the creditor.

(b) The New Insider Rules.

The old law had no special statutory rules or defenses for insider transactions, although there was case law which interpreted insider transactions as more suspect than other transactions. Under the new law, a transfer is voidable for one year after the transfer is made when the transfer was made to an insider on account of an antecedent debt, the debtor was insolvent at the time, and the insider had reason to believe that the debtor was insolvent. Available defenses include: new value, ordinary course of business, and a good-faith effort to rehabilitate the debtor and the transfer secured present value given for that purpose as well as an antecedent debt of the debtor.

(c) Proving Actual Fraud.

To prove actual intent to hinder, delay or defraud creditors, old case law allowed creditors to prove badges of fraud such as whether:

  1. the transfer or obligation was to an insider;
  2. the debtor retained possession or control of the property transferred after the transfer;
  3. the transfer or obligation was disclosed or concealed;
  4. before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
  5. the transfer was of substantially all the debtor’s assets;
  6. the debtor absconded;
  7. the debtor removed or concealed assets;
  8. the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
  9. the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
  10. the transfer occurred shortly before or shortly after a substantial debt was incurred; and
  11. the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

Now these badges are expressly enumerated in the new law.

(d) Proving Constructive Fraud

Because proving the actual intent of fraudsters is so difficult, much of the old case law was devoted to construing the constructive fraud statute which stated:

“Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.” (emphasis supplied)

(i) insolvency

The old law regarded a person as insolvent “when the present fair salable value of his assets is less than the  amount that will     be required to pay his probable liability on his existing debts as they become absolute  and  matured.” There was no statutory test for insolvency under the old law.

Under the new law, “(a) A debtor is insolvent if, at a fair valuation, the sum of the debtor’s debts is greater than the sum of the debtor’s assets. (b) A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.”

Under the new law, there are two tests for insolvency for purposes of constructive fraudulent transfer claims by a creditor:

  1. Was the debtor engaged or about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction? or
  2. Did the debtor intend to incur, or believe or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due?

(ii) Consideration

Under the old law, “Fair consideration” has two components, namely “fair value” and “good faith”.

The new law imposes a “reasonably equivalent value” standard, thereby removing consideration of intent in the context of a constructive fraudulent transfer.

Also of note is that the new law curtails the grounds for attack of a properly executed foreclosure sale in that it provides that reasonably equivalent value is given “if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, or security agreement.”

  1. Attorneys’ Fees

Under the old law, attorney’s fees could be recovered for actual fraud; however, the case law required that both the transferee and transferor manifested fraudulent intent as a condition of an award of attorneys’ fees. Under the new law, attorneys’ fees can now be recovered for both constructive and actual fraud.

The new law has not been tested in New York State Courts yet because the state courts have been closed for all non-essential matters due to the Covid-19 pandemic. The Uniform Voidable Transactions Act has been adopted in many other states, so cases from other states can influence how the statute will be construed in New York. Whether the new law actually will benefit creditors or fraudsters remains to be seen.

If you have any questions about the new law or are considering bringing a fraudulent conveyance action, please contact Antonia Donohue at (516) 393-8217 or

Unlike corporations, which are not required by law to have stockholders agreements (no matter how advisable that may be for its owners), limited liability companies formed in New York are required to have a written operating agreement. The requirement for a written agreement puts New York in a distinct minority of states – while several require operating agreements, most that do permit them to be written, oral or implied.

As the agreement of a limited liability company is required to be entered into before, at the time of or within ninety days after the filing of the articles of organization, the company is necessarily newly formed, and its owners may not want to invest significant time, effort and expense in drafting a lengthy operating agreement when they may be unsure of the viability of the business. As a result, we are often asked by clients to prepare a “simple” operating agreement. But how “simple” can a simple operating agreement be, and is entering into such an agreement advisable?

To start with, the New York Limited Liability Company Law (the “LLCL”) does not provide much detail as to what an operating agreement consists of. Section 102 of the LLCL defines an operating agreement as “any written agreement of the members concerning the business of a limited liability company and the conduct of its affairs and complying with section four hundred seventeen of this chapter.” Section 417 provides just a general guide for what should be in an operating agreement: “the members of a limited liability company shall adopt a written operating agreement that contains any provisions not inconsistent with law or its articles of organization relating to (i) the business of the limited liability company, (ii) the conduct of its affairs and (iii) the rights, powers, preferences, limitations or responsibilities of its members, managers, employees or agents, as the case may be.”

The simplest operating agreement would be one that provided the names, addresses, and the value of initial capital contributions of each of the members and incorporated by reference the default provisions of the LLCL. As a one page document, such an agreement would certainly satisfy a client looking for an inexpensive operating agreement. But would it work?

Operating agreements generally deal with three types of issues, namely management of the company, transfers of interests in the company, and financial/tax issues. As discussed below, the default provisions of the LLCL deal with these issues, but not in a way that is necessarily expected or desirable.


A limited liability company can be managed by one or more managers (if the company’s articles of organization so provide) or by the members themselves. As we are drafting with simplicity as the goal, the company will presumably be member managed, so that we don’t have to deal with how managers are elected and removed and what issues, if any, need to be approved by the members. Assuming our client wants all decisions to be made by a simple majority vote based on the members’ respective ownership, then our simple agreement does the job. Section 402(a) of the LLCL provides, “Except as provided in the operating agreement, in managing the affairs of the limited liability company, electing managers or voting on any other matter that requires the vote at a meeting of the members pursuant to this chapter, the articles of organization or the operating agreement, each member of a limited liability company shall vote in proportion to such member’s share of the current profits of the limited liability company …”, and Section 402(f) states, “Whenever any action is to be taken under this chapter by the members or a class of members, it shall, except as otherwise required or specified by this chapter or the articles of organization or the operating agreement as permitted by this chapter, be authorized by a majority in interest of the members’ votes cast at a meeting of members by members or such class of members entitled to vote thereon.” In other words, the default is majority approval, voting by ownership (not per capita, or one vote per member).

As a technical aside, note that the vote is by a majority of the votes cast as a meeting. If a majority owner is present at a meeting (thereby providing a quorum), but abstains from voting on a matter, that matter could still be approved by a majority of the votes cast, even if such votes were not a majority of the outstanding membership interests.

While the default voting provisions may work, there is one customary management-related provision that is missing from our simple agreement – namely a provision requiring the indemnification of members with respect to claims arising out of the operations of the company. While Section 420 of the LLCL provides that a limited liability company may indemnify and hold harmless members, the LLCL does not require it to do so. As a result, if, for example, a member signs a contract on behalf of the company and then finds himself named in a suit by the other party as a result of having done so, he will be forced to count on the good will of his fellow members with regard to any defense and settlement costs (note that the Business Corporation Law authorizes a court to award indemnification if a corporation fails to do so; there is no corresponding right in the LLCL).

Transfers of Interests

Most business owners are familiar with the ownership and transfer of shares of corporate stock. Absent unusual circumstances, the transfer of a share of stock conveys both the right to vote such share and the financial rights associated with it, such as the right to a pro-rata share of dividends payable by the corporation. The LLCL, however, contains a trap for the unwary, and use of our simple agreement may result in unintended consequences.

Generally speaking, most owners of non-publicly traded businesses do not want the equity interests of their company to be freely tradable. Being told by your now former partner that he’s given his 50% interest in your company to your ex-spouse is presumably not good news. However, like the Business Corporation Law, the LLCL does not preclude transfers of membership interests – only a provision in an operating agreement can do so (in fact Section 603(a)(1) clearly states that unless otherwise provided in an operating agreement, “a membership interest is assignable in whole or in part”). So unless the members are prepared to have new unknown and unlimited co-owners, our simple operating agreement is, to put it simply, too simple.

Having said that, it’s not all bad news. Unlike transferring shares of stock, in the absence of a provision to the contrary in the operating agreement, a transfer of an interest in a limited liability company does not, to the (sometimes unfortunate) surprise of many, convey any rights other than economic rights. Section 603(a) goes on to state, “an assignment of a membership interest does not … entitle the assignee to participate in the management and affairs of the limited liability company or to become or to exercise any rights or powers of a member” and that “the only effect of an assignment of a membership interest is to entitle the assignee to receive, to the extent assigned, the distributions and allocations of profits and losses to which the assignor would be entitled.” Section 604(a) further provides, “Except as provided in the operating agreement, an assignee of a membership interest may not become a member without the vote or written consent of at least a majority in interest of the members, other than the member who assigned or proposes to assign such membership interest.”

What happens to those non-economic rights, such as the right to vote and inspect books and records? They don’t remain with the transferring member – they simply cease to exist. As provided in Section 603(a)(4), “a member ceases to be a member and to have the power to exercise any rights or powers of a member upon assignment of all of his or her membership interest.”

The net effect of all of this is that the original members may end up with some silent partners, which most business owners would find to be less than an ideal situation. The remaining original members could, for example, be working to benefit a competitor, and at the very least could be working to benefit someone who contributes neither effort nor cash to the business. While the operating agreement could address this issue by, for example, prohibiting transfers outside of the existing members or making any transfer subject to a first refusal, our simple agreement will allow transfers of economic rights to anyone the transferee may choose.

Putting aside the default rules of the LLCL, a normal operating agreement deals with a number of transfer scenarios that the simple agreement does not address. A more fulsome operating agreement usually requires the sale of a member’s interest upon his or her death or disability, and may require sale of a member’s interest if that member ceases to render services to the company, whether as the result of retirement, resignation, or termination by the other members for cause or gross cause.

In terms of death or disability, the remaining members usually do not want to be growing the company for the benefit of non-working heirs, and the heirs usually desire a buy out as the income of the deceased member will have ended. As to work related buyouts, many individuals assume that if a member commits a bad act (whether simply not showing up for work or something as drastic as embezzlement), they can simply terminate the wrongdoer. However, while they may be able to cut off compensation to the wrongdoer, he or she remains the owner of their equity in the company and cannot be divested of their ownership without consent. Absent appropriate language in an operating agreement, two members may continue to devote their full time to growing the business, while the third member relaxes at the beach, content to not receive a salary, but awaiting their share of the operating profits and a payday down the road when the business is sold. So long as the relationship of the members remains harmonious, the simple agreement may work, but using it could make getting a business divorce much more painful and expensive than it would otherwise need to be should issues arise.

Another concern that our simple agreement does not address is the effect of having members which are entities. For example, rather than having three individuals as members of a company, the three individuals may desire to hold their interest through their own entities. One reason for doing so would be to facilitate estate planning by transferring interests in the entity-member. The other members would continue to deal with the entity-member, and would not have to deal with the initial owner’s estate planning transferees. However, holding interests in an entity also gives the owner of that entity the right to do something indirectly that he or she couldn’t do directly – namely make transfers of an entire membership interest, including voting rights. If an individual owned a 25% interest in his or her name and then sold it to a third party, as discussed above the transfer would convey only economic rights, without the other rights that come with being a member. If, on the other hand, the individual owned the 25% interest through an entity, the individual could very easily sell the ownership of that entity to a third party. The owner of the 25% interest would not change (the only change would be with respect to the owner of that owner), meaning that since there was no transfer of that interest, there is no loss of any rights associated with that interest upon the transfer of the underlying interest. The other owners would now be dealing with a new full partner, not just a silent one.

One final thought on this issue – without a provision dealing with the death of a member, the surviving members will now have a new partner – the heirs of the deceased member, a situation that no one may be happy with. The survivors will be continuing to devote their efforts to the success of the business, something the heirs may play no role in, and they may resent having to share the fruit of their efforts with someone who makes no contribution. The heirs, on the other hand, will having no voting rights. While this may be reasonable if they own a relatively small portion of the equity, consider the situation where the deceased member owned, for example, 75% of the equity. What 75% owner would want to have a 0% say in how the business is run?

So while our “simple” agreement can work, it is rare that the members will be agreeable to the application of the default rules of the LLLC with respect to transfers of membership interests. The inability to prohibit even economic transfers (or, as a practical matter, any transfers by a member that is an entity), the inability to remove members under appropriate circumstances, and the loss of voting rights upon the death of a member are all problematic results of using the simple agreement.

Financial/Tax Issues

The LLCL contains a number of default provisions that will work if our members have a truly simple financial structure in mind, with no obligation to make capital contributions other than the initial contributions upon formation of the company, and all allocations of profits and losses and all distributions being made pro rata based on equity ownership. The LLCL doesn’t require a member to make any capital contributions other than those he or she promised to make. Section 503 provides that “[i]f the operating agreement does not so provide, profits and losses shall be allocated on the basis of the value, as stated in the records of the limited liability company if so stated, of the contributions of each member” and Section 504 states, “[i]f the operating agreement does not so provide, distributions shall be allocated on the basis of the value, as stated in the records of the limited liability company, if so stated, of the contributions of each member.”  As a result, our simple agreement will work for situations where the financial and tax understandings are equally simple.

However, if, as is often the case, the members want to require capital contributions beyond those made at formation or provide for preferred returns or allocations or distributions that are not strictly pro-rata, our simple agreement will not suffice.

While the simple agreement may work with respect to contributions and how allocations and distributions are to be made, there is one very important issue that it does not address, namely the making of tax advances. Assuming the limited liability company is taxed as a partnership (which is usually the case), each member will receive a K-1 for his or her share of the company’s profits, regardless of whether they actually receive any distributions from the company (what is known as “phantom income”). The LLCL does not require the making of distributions prior to dissolution; to the contrary, in Section 507 it expressly defers this issue to the operating agreement: “to the extent and at the times or upon the happening of events specified in the operating agreement, a member is entitled to receive distributions from a limited liability company before his or her withdrawal from the limited liability company and before the dissolution and winding up of the limited liability company.”

While presumably each of the members will want to cause the company to distribute at least as much cash as is needed to avoid having reach into their own pocket to pay taxes on the company’s profits, there may be situations where the members don’t cause the company to make tax advances. A legitimate reason may be a prohibition in a (badly negotiated) loan agreement, or because the members truly desire to accumulate cash in the company for working capital or other proper purposes. However, not making tax advances is better known as one of the more typical ways that majority owners can freeze out minority owners, particularly minority owners of lesser means than the majority. By not distributing funds sufficient to pay taxes, the majority can put the minority in a position of having to either pay such taxes out of personal resources or sell their interests to the majority. While maliciously engaging in such tactics may give rise to a lawsuit by the minority owner, the much better approach would be to mandate tax advances in the operating agreement. Our simple agreement, however, is too simple to provide for this.

Finally, our simple agreement does not contain any of the customary tax-related provisions that a more complete agreement would have, such as those dealing with the establishment and maintenance of capital accounts, not requiring members to restore deficits in capital accounts, various regulatory allocations under Section 704 of the Internal Revenue Code (including “qualified income offset,” “minimum gain chargeback” and “partner nonrecourse debt minimum gain chargeback” provisions), and the appointment of a tax matters representative. The ramifications of the absence of these provision is beyond the scope of this article.


So is there such a thing as a “simple” operating agreement? Certainly. The LLCL’s default provisions, particularly majority voting, no obligation to make capital contributions, and pro-rata distributions and allocations, are often components of the comprehensive operating agreements we routinely draft. But does a “simple” operating agreement make sense? That’s an entirely different issue. The ability to make even just economic transfers without consent, the lack of required tax advances, and the loss of voting rights on death are some default provisions that many owners would find problematic. In addition, common business terms such as being required to make additional contributions, preferred or priority returns, prohibitions on or rights of first refusal with respect to transfers, and supermajority voting on significant actions all require an agreement that goes beyond the bare minimum. The answer is to draft an agreement that works both when you sign it and when circumstances change – an agreement that anticipates events that may happen, rather than assuming they won’t. The best time to discuss and negotiate an operating agreement is when the entity is being formed, when the owners are aligned and before differences arise; if agreement on these issues can’t be reach at inception, it’s certainly not going to happen after issues have arisen and the company has grown to be worth fighting over. As the attorneys in our Litigation Practice Group will confirm, simple doesn’t necessarily mean better, and a few dollars spent up front can save many dollars down the road.

On April 22, 2020, a series of bills designed to address the effects of the COVID-19 pandemic were introduced in the New York City Council during its first-ever remote session. A number of these bills relate to landlord/tenant matters and, after some debate among the council members, were referred to committees. This blog post summarizes the proposed landlord/tenant legislation and discusses considerations for commercial landlords in New York City in light of potential changes in the law.

Int. 1912-2020

Int. 1912-2020 is a bill that would suspend the enforcement of evictions against individuals and businesses impacted by COVID-19 through at least April 2021.

Among other things, this bill prohibits the city sheriff and marshals from evicting tenants until the “first suspension date,” which is defined as the later of: (i) the end of the first month that commences after the end of the eviction moratorium set out in Governor Cuomo’s Executive Order 202.8 (currently, this moratorium is set to expire on June 20, 2020); (ii) the end of the first month that commences after the end of the eviction moratorium set out in the federal Coronavirus Aid, Relief and Economic Security Act (CARES Act) (currently, this moratorium is set to expire on July 25, 2020); or (iii) September 30, 2020. The bill does contain exceptions—it would permit evictions: (i) when ordered by the governor or mayor, or when necessary to carry out an order by the governor or mayor; and (ii) when ordered in connection with a matter that is under the jurisdiction of the Family Court.

The bill further provides that, except in limited circumstances, the city sheriff and marshals will remain barred from carrying out evictions until the “second suspension date” which is defined as the later of: (i) the end of the seventh month that commences after the expiration of the state eviction moratorium, (ii) the end of the seventh month that commences after the expiration of the federal eviction moratorium; or (iii) April 1, 2021. Evictions will only be permitted during this time if one of the exceptions relevant to the first suspension period is met, or if the tenant “has been provided a reasonable opportunity to show the court…that [he/she/it] suffered a substantial loss of income because of COVID-19 and such court has found that [he/she/it] has not suffered such a loss or has effectively waived [the] opportunity [to make such a showing].”

The bill sets out a list of ways in which a party may show that it has “suffered a substantial loss of income because of COVID-19.” Specifically, where the tenant is an individual, the required showing can be made if, between March 7, 2020 and the first suspension date, the individual experienced two or more weeks in which (i) he or she claimed federal or state unemployment insurance benefits in connection with a claim that was filed on or after March 7, 2020 or (ii) he or she worked fewer than three days and earned less than $504 because of one or more of the following situations:

  1. The person was diagnosed with COVID-19 or was experiencing symptoms of COVID-19 and seeking a medical diagnosis;
  2. A member of the person’s household was diagnosed with COVID-19;
  3. The person was providing care for a family member or a member of the person’s household who was diagnosed with COVID-19;
  4. A member of the person’s household for whom the person had primary caregiving responsibility was unable to attend school or another facility that was closed as a direct result of the COVID-19 state disaster emergency and such school or facility care was required for the person to work;
  5. The person was unable to reach the person’s place of employment because of a quarantine imposed as a direct result of the COVID-19 state disaster emergency;
  6. The person was unable to reach the person’s place of employment because the person had been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
  7. The person was scheduled to commence employment and did not have a job or was unable to reach the job as a direct result of the COVID-19 state disaster emergency;
  8. The person became the breadwinner or major supporter for a household because the head of the household died as a direct result of COVID-19;
  9. The person quit a job as a direct result of COVID-19; or
  10. The person’s place of employment is closed as a direct result of the COVID-19 state disaster emergency.

The bill also addresses the ability of the city sheriff and marshals to enforce a money judgment against the guarantor of a lease, stating that such a judgment cannot be enforced against an individual guarantor before the second suspension date if that individual meets one of the ten conditions described above.

Where the tenant is a business, it can show that it suffered a substantial loss of income because of COVID-19 by demonstrating that: (i) it was subject to seating, occupancy or on-premises service limitations pursuant to an executive order issued by the governor or mayor during the COVID-19 period; or (ii) its revenues for any three-month period between March 7, 2020 and the first suspension date, were less than 50 percent of its revenues for the same period in 2019 or less than 50 percent of its aggregate revenues for the months of December 2019, January 2020, and February 2020.

Int. 1932-2020

Int. 1932-2020 is a bill that would prohibit landlords from enforcing a personal liability provision against any commercial tenant impacted by COVID-19, and would make such conduct a form of harassment.

Specifically, the bill would amend the New York City Administrative Code to bar enforcement of a personal liability provision against a business impacted by COVID-19 where the event of default occurred between March 7, 2020 and: (i) the end of the first month that commences after the end of the eviction moratorium set out in Governor Cuomo’s Executive Order 202.8; (ii) the end of the first month that commences after the end of the eviction moratorium set out in the CARES Act; or (iii) September 30, 2020. The term “impacted by COVID-19” largely mirrors the definition of “suffered a substantial loss of income because of COVID-19” set forth in Int. 1912-2020.

The bill also proposes to amend Section 22-902 of the New York City Administrative Code to include within the definition of “commercial tenant harassment” the act of “threatening to or implementing a personal liability provision that is not enforceable” for the reasons described above.

Int. 1914-2020

Int. 1914-2020 would amend section 22-902 of the New York City Administrative Code to bar landlords from threatening a commercial tenant because of its “status as a person or business impacted by COVID-19, or…its receipt of a rent concession or forbearance of any rent owed during the COVID-19 period.” As a result of this amendment, landlords who engage in such conduct would be subject to a fine ranging from $10,000 to $50,000.

Int. 1936-2020

Int. 1936-2020 would amend the definition of “harassment” in the Housing Maintenance Code to include threats against an individual based on their status as a COVID-19 impacted person, their status as an essential employee, or their receipt of a rental concession or forbearance. Such harassment would be subject to a penalty of between $2,000 and $10,000.

Practical Consequences

These proposed bills make it more important than ever for landlords to attempt to privately resolve matters with non-paying commercial tenants. Landlords are likely to have greater latitude in negotiations at this time, before they have to worry about restrictions on “threats” to enforce personal guarantees or take other action as a result of a business’ receipt of a rent concession or forbearance. Additionally, if these bills become law, eviction proceedings over the next year will become more costly because they will involve litigation about tenants’ financial condition and ability to pay rent. Landlords should consider whether it makes sense to avoid these costs by negotiating with tenants now instead. At the very least, negotiations will allow landlords to request documents from tenants to substantiate their financial condition, and these documents will be helpful in future proceedings if they need to be brought.

More details about negotiation and litigation strategies for commercial landlords can be found here in our prior blog post. If you need assistance, please contact Steven Schlesinger at or Marci Zinn at

This afternoon, President Trump signed the Paycheck Protection Program and Health Care Enhancement Act (the Act) into law.

Among other things, the Act appropriates an additional $310 billion to the Paycheck Protection Program (PPP) that was first established by the Coronavirus Aid, Relief and Economic Security (CARES) Act. However, small businesses should be forewarned–most if not all of the additional funding is already spoken for, and the PPP is expected to run out of money again shortly after lending resumes on Monday, April 27th at 10:30 a.m.

This blog post will summarize the Act’s additional funding for small business loans and grants, recent changes to the regulations governing the PPP and the realities of obtaining PPP loans going forward.

Additional Funding for PPP and EIDL Loans

The CARES Act initially appropriated $349 billion to the PPP to fund government-backed loans to qualifying businesses to cover payroll costs, rent, mortgage interest and utilities. The full amount of principal may be forgiven for borrowers who comply with the PPP’s terms and conditions. However, as of April 16, 2020, funding for the PPP was exhausted, leaving a vast number of businesses without much-needed financial relief.

The Act attempts to address this problem by appropriating an additional $310,00,000,000 to the PPP, plus $11,335,000,000 to cover the administrative costs of the Small Business Administration (SBA). Out of this approximately $321 billion, $60 billion is set aside for small, mid-size and community lenders, as follows:

  • The SBA shall guarantee no less than $30 billion in loans made by (1) insured depository institutions with consolidated assets of at least $10 billion and less than $50 billion; and (2) credit unions with consolidated assets of at least $10 billion and less than $50 billion; and
  • The SBA shall guarantee no less than $30 billion in loans made by (1) community financial institutions; (2) insured depository institutions with consolidated assets of less than $10 billion; and (3) credit unions with consolidated assets of less than $10 billion.

The Act also appropriates $50 billion for the SBA’s Economic Injury Disaster Loans (EIDL) Program, and $10 billion for emergency EIDL grants.

New PPP Regulations

Although the PPP was ostensibly designed to benefit small businesses facing economic hardships as a result of the COVID-19 pandemic, it has been reported that a number of financially sound institutions acquired substantial PPP loans. For example, despite having cash-on-hand of approximately $100 million, Shake Shack, a national fast food chain, acquired a $10 million PPP loan. After mass outcry, Shake Shack announced that it would return the funds it received from the PPP.

Ahead of the Act’s infusion of additional funds into the PPP, the Department of the U.S. Treasury (Treasury) issued updated guidance to address this backlash. On April 23, 2020, Treasury added a section to its Frequently Asked Questions document (FAQs) addressing the eligibility of “large companies with adequate sources of liquidity to support the business’s ongoing operations.” The FAQs note that applicants are required to certify that “[c]urrent economic uncertainty makes [a PPP] loan request necessary to support [its] ongoing operations….” Applicants cannot make this certification in good faith without assessing whether they have access to other funds that can support their ongoing operations without resulting it significant detriment to the business. As an example, the FAQs note that it is “unlikely” that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. SBA may request that such a borrower substantiate the basis for its certification.

The FAQs go one step further, addressing borrowers who acquired PPP loans before the issuance of this updated guidance. According to Treasury, “any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” At a press conference, Treasury Secretary Steven Mnuchin cautioned that there will be “severe consequences” for businesses that do not comply, emphasizing that the PPP was designed to benefit “small businesses that need it, people who have invested their entire life savings.”

The Practical Realities of Tapping Additional PPP Funding

When the PPP ran out of funds on April 16th, thousands of loan applications were stalled in the midst of being processed. Because of this, most financial institutions have a significant backlog of applications, and few new applicants are likely to obtain PPP loans. According to Nick Simpson, a spokesman with the Consumer Bankers Association, “the majority if not all of the [Act’s] funding…is already exhausted.”

What remains to be seen is the amount of money that will be returned to the PPP because of the new obligation for larger companies to repay their loans within the next two weeks, and whether this will significantly expand the ability of smaller companies to acquire loans.

With all of the uncertainty surrounding the availability of the additional PPP funding appropriated by the Act, it is imperative that companies have their loan applications completed now–before lending resumes. Anecdotally, we have observed that our clients have had greater success in obtaining PPP loans from regional and local banks and credit unions. Additionally, applicants may find that Fintech companies, such as PayPal, that became approved PPP lenders shortly before the program ran out of money, may have a smaller backlog of applications. Simply put, it is essential to find a lender and arrange to submit an application at the first opportunity; those who delay at all are sure to be left out in the cold.

If you need assistance with lending or borrowing under the PPP, please contact Jessica M. Baquet at (516) 393-8292 or, or Samantha Guido at (516) 393-8250 or

Although a large portion of the funds from the CARES Act is going to certain air carriers and businesses critical to national security, some $454 billion is allocated to the Federal Reserve Board to help provide financial relief to other eligible businesses. Specifically, that money will fund the Federal Reserve’s programs and facilities that promote financial stability and lending to eligible businesses or, as stated in the Act, the funds will be allocated to “programs or facilities established by the Board of Governors of the Federal Reserve System for the purpose of providing liquidity to the financial system that supports lending to eligible businesses, States and municipalities.”

​The funds will be used to: (1) purchase obligations or other interests directly from the issuers, (2) purchase obligations in secondary markets, and (3) make loans, including loans or advances secured by collateral. One such Federal Reserve program is the “Federal Reserve Direct Loan” program and, as part of that program, banks and other lenders receive funds in order to make direct loans to eligible businesses, with between 500 and 10,000 employees, who do not qualify for a Paycheck Protection Program loan.

What is a “Direct Loan”?

In this context, a “direct loan” is “a loan under a bilateral loan agreement that is (1) entered into directly with an eligible business as borrower; and (2) not part of a syndicated loan, a loan originated by a financial institution in the ordinary course of business, or a securities or capital markets transaction.” It cannot be forgiven.

Which Business Are Eligible for Direct Loans?

The Secretary may make a loan, loan guarantee or other investment as part of a program or facility that provides direct loans only if the eligible business receiving the direct loan agrees to certain requirements:

  • First, the business must be organized and domiciled in the United States, and have significant operation in and a majority of its employees based in the United States.
  • Second, the business must agree that for the length of the direct loan, plus one (1) year, it will not, on any national securities exchange, repurchase an equity interest in itself (or any parent company). As one exception, however, an eligible business may repurchase an equity security if such repurchase is required by a contract in effect on the date the CARES Act was enacted.
  • Third, the eligible business cannot, for the length of the loan plus one (1) year, pay dividends or make other capital distributions with respect to its common stock.
  • Finally, the eligible business must comply with the limitations on compensation set forth in section 4004 of the CARES Act.

Of course, the Secretary has the discretion to waive the aforementioned requirements “to protect the interests of the Federal Government.”

What is Section 4004 of the CARES Act?

​As we discussed in a prior blog post, Section 4004 of the CARES Act addresses limitations on certain employees’ compensation. The Section’s requirements apply to businesses receiving loans from the $46 billion allocation, and also to certain eligible businesses discussed in this post.

​Under section 4004, the eligible business must agree that officers and employees who, in 2019, made more than $425,000 (including salary, bonuses, awards of stock, and other financial benefits) will not receive (1) total compensation exceeding, during any consecutive 12-month period, the total compensation received in 2019, or (2) severance pay or other benefits upon termination of employment in excess of two (2) times the maximum total compensation received in 2019.

​Section 4004 also requires the eligible business to agree that no officer or employee who earned more than $3 million in 2019 will receive, in any consecutive 12-month period, total compensation in excess of $3 million plus 50% of the compensation received in excess of $3 million in 2019.

Direct Loans for Mid-Size Businesses

​Additionally, the Secretary is instructed to endeavor to implement a Federal Reserve program that will, to the extent practicable, make direct loans to mid-sized profit and nonprofit businesses that have between 500 and 10,000 employees. Such loans will be subject to an annual interest rate no higher than 2%, and no principal or interest payments are due for the first six (6) months.

To be eligible for this type of loan, the business, in addition to requirements set forth above, must certify that: (1) the uncertainty of the economic conditions makes the loan application necessary to support ongoing operations of the business, (2) the borrower is not a debtor in a bankruptcy proceeding, (3) the borrower will remain neutral in any union organizing effort for the term of the loan, and (4) that the borrower will not abrogate existing collective bargaining agreements for the length of the loan plus two (2) years. Additionally, the eligible business cannot pay dividends with respect to its common stock, cannot repurchase an equity security listed on a national securities exchange (with the exception as set forth above), and cannot offshore or outsource jobs for the length of the loan, plus two (2) years.

More importantly, the business must certify that the direct loan it receives will be used to retain at least 90% of the business’s workforce at full compensation and benefits until September 30, 2020 and that the business intends to restore at least 90% of the workforce of the borrower that existed on February 1, 2020, which includes restoring all compensation and benefits to the workers no later than four (4) months after the termination date of the public health emergency declared by the Secretary of Health and Human Services.


​While this is only an introduction and summary of certain provisions of Title IV of the CARES Act, it is clear that the CARES Act is providing support to businesses to encourage the retention of employees and encourage payment of employees during these difficult times. As always, if you need assistance or have any questions about the CARES Act, contact any member of our Coronavirus Response Team.

New York Courts have resumed some of their operations despite the physical closing of most courthouses and a continued moratorium on the filing of new non-essential cases. Proceedings, including conferences and oral argument of pending motions, are now primarily conducted by videoconference through Skype.

As it concerns landlord/tenant matters, the statewide moratorium on evictions remains in place through June and may be extended. The prohibition on evictions by New York City marshals also continues to be effective “until further notice.”

Several bills have been introduced in the New York State legislature concerning landlord/tenant issues. Some legislators have proposed pro-tenant legislation that would: (i) extend the moratorium on evictions until December 2020; and (ii) cancel rent obligations altogether for 90 days. Another proposed bill is favorable to landlords, and seeks to have vouchers sent from the State directly to landlords for payment of tenants rent. None of these bills have been voted on as of today.

Many commercial landlords are wondering: what’s next?

The Realities of Future of Landlord/Tenant Litigation

With many commercial tenants not paying any rent, commercial landlords may find themselves planning to litigate at the first opportunity. However, they must keep in mind the practical realities of life in a post-coronavirus world in deciding how to proceed.

When courts resume full operations and the moratorium on evictions is lifted, there will be a torrent of landlord-tenant cases and inordinate delays as a result. Substantial time and money will need to be expended if litigation is pursued. There will also be more risk involved, as judges with equitable powers may favor commercial tenants that were forced to close their businesses during the height of the pandemic.

Landlords who bring proceedings will need to seek discovery of their tenant’s finances to determine if the tenant actually had the financial ability to pay rentCertain businesses, such as grocery stores, garment businesses that manufacture masks or surgical gowns, and retailers with significant online sales may have had the ability to pay rent due to a consistent revenue stream or, in some cases, revenue growth.

Discovery of this type is time-consuming whether conducted as of right in a plenary action, or after obtaining court approval in a landlord/tenant proceeding. Therefore, by the time documents are demanded and produced, many months will have expired, all while the landlord is not receiving rent and its own financial obligations continue. Given this, what can a commercial landlord do besides wait to litigate?

Alternatives to Litigation

Landlords should consider whether their business plans and financial circumstances would be better served by negotiation and private resolution. Has an entire building of tenants stopped paying rent? If so, reaching resolutions that quickly bring cash through the door might be critically important. How important is your location to the continuing viability of the tenant’s business? If the tenant cannot easily operate from a different location, you may have significant leverage in negotiations. On the other hand, could the premises easily be rented to a different tenant if the current tenant vacates the space? How would the rental rate charged to a new tenant compare to the current rental rate? Depending on the answer to these questions, the landlord may have more or less incentive to compromise.

If you conclude that your business needs are best served by negotiating now rather than waiting to go to court, reach out to your tenants and suggest that accommodations can be made during this time, while reserving your right to later pursue collection of the full amount of rent due. During negotiations, you may ask tenants to prove financial hardship by providing you with financial statements and revenue information. Although such information may be beyond that which is usually exchanged when leases are negotiated, landlords will be justified in requesting it to determine if a tenant actually needs rent relief or is taking advantage of the current situation.

Accommodations that a landlord might make include:

  1. Rent deferral: Under such an arrangement, a tenant may repay the amount of rent arrears in installments over a period of months or years, together with future monthly rent as it becomes due. If the tenant defaults, all past and future rent may be accelerated and a judgment may be entered. Other potential terms might include an extension of the leasehold term or a landlord’s right to terminate the lease early.
  2. Temporary monthly rent reductions: Rent may be reduced for a brief period of time to an amount that the tenant can afford.
  3. Extension of the lease term in exchange for a decrease in monthly rent.
  4. Use of security deposit for current rent with an agreement that the tenant will replenish the security deposit in the future.
  5. Addition of a personal guarantor to a lease that did not have one, or that previously only had a “good guy” guaranty, in exchange for a partial rent concession for a limited period of time.
  6. Rent reduction in exchange for the tenant’s release of the landlord from all COVID-19 claims and a waiver of its defenses to non-payment.

Note that any agreement between landlord and tenant should be reduced to writing. Consideration must be given as to whether to include confidentiality provisions, ratification of the existing lease, an express reservation of existing rights, and estoppel provisionsFurther, if there was a guarantor on the original lease, the guarantor should affirm and agree to any modifications or additional terms.

Encouraging the Recalcitrant Tenant to Negotiate

If a tenant is not even receptive to an overture to negotiate, consider:

  1. Sending a 5-day rent statement, which is required as a predicate for any landlord/tenant proceeding, and should be sent each month during this period anyway to preserve rent claims. Note that the statute requires sending this notice via first class mail, return receipt requested. However, during this time in which tenants may not have access to the premises, the notice should be sent in that manner to meet the statutory requirements, and via regular first class mail to every known address of the tenant, its owner or agent, and any guarantor. You may even consider sending a copy of the notice to the tenant by e-mail to ensure the tenant receives it.
  2. Serving a 14-day statutory rent demand. However, this can be costly, as a process server will likely need to make multiple attempts to serve the notice before “nailing and mailing” it, given that a business’ premises will likely be closed. Serving this notice is a way to let the tenant know that the rent is still due and that the landlord is prepared to commence a proceeding as soon as the moratorium is lifted. Sending the notice to all additional addresses for the tenant, in addition to the business premises, may be a way to protect against a tenant later defending itself by saying that it had no idea that its business had been served, since it was required by order not to go into its premises and may not even have received business mail.  

If a tenant decides to commence negotiations after receiving these rent demands, the landlord should make sure to send the tenant a notice of “reservation of rights”, including a statement that the service of the 14-day notice remains in full force and effect and is not waived by engaging in negotiations.

If all else fails, a landlord should have a petition drafted so that it can be served on the tenant as soon as the eviction moratorium is lifted. This will enable the landlord to file its papers with the court expediently and, hopefully, put its case towards the front of the line of cases on the court’s calendar.


Although it may feel like the world has come to a halt, this is no time for landlords to sit on their hands. Taking a pragmatic but proactive approach to non-paying tenants will help to insulate a landlord from the chaos that will undoubtedly ensue when the moratorium on evictions is lifted.

As governmental orders and legislation can change daily and may alter a landlord’s decision and strategy, staying informed is of the utmost importance. If you need assistance, please contact Steven Schlesinger at or Marci Zinn at

This morning, Governor Cuomo announced during a press conference that his stay-at-home order, otherwise known as “New York on Pause,” will be extended through at least May 15, 2020.

Governor Cuomo’s initial stay-at-home order, Executive Order 202.6, required non-essential businesses to keep 50% of their workforces at home beginning on March 20, 2020. The Governor then issued Executive Order 202.7, which increased the percentage of the workforce that must stay at home to 75%, followed by Executive Order 202.8, which increased that percentage to 100%.

Executive Order 202.8 was to remain in place until April 19, 2020, but was later extended through April 29th by Executive Order 202.14. We expect that the latest extension will be contained in Executive Order 202.18, which has yet to be published.

Today’s announcement comes on the heels of other recent pronouncements by the Governor that are designed to slow the spread of COVID-19. These include, among others:

  • Executive Order 202.15, which provides that all individuals may vote in elections taking place before June 23, 2020 by absentee ballot as a result of the pandemic.
  • Executive Order 202.16, which requires employers to provide, at their own expense, face coverings to all employees who have direct contact with customers or members of the public. Those employees are required to wear such face coverings.
  • Executive Order 202.17, which requires all individuals over age 2 to wear face coverings over their noses and mouths when in public and unable to maintain social distance.

Although last week was described as the apex of the pandemic in New York, it is clear that we will not soon be returning to life as we once knew it.

For questions about the Governor’s executive orders, please contact Jessica M. Baquet at (516) 393-8292 or or Rachel Morgenstern at (516) 393-8291 or

This morning, the Small Business Administration (SBA) issued a Lapse in Appropriations Notice, in which it announced that it would not accept additional applications for the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan Program (EIDL) because all available funds have been exhausted. It has been reported that, in total, SBA approved 1,661,397 loans from 4,975 lenders.

Although Treasury Secretary Steven Mnuchin previously asked Congress to appropriate an additional $250 million to the PPP, Republicans and Democrats have yet to reach an agreement on further legislation. While Republicans are pushing a standalone measure to replenish the PPP, Democrats want additional funding to be a part of a larger measure that also appropriates money for hospitals, states and nutrition assistance program.

A deal to infuse funds into the PPP funding won’t be reached in the immediate future, as the Senate adjourned for the week after a brief “pro forma” session earlier today. Another session is scheduled for Monday.

In the meantime, small businesses that wish to take advantage of the PPP should complete their applications and gather all necessary supporting documentation now. Since additional funding for the PPP seems to be a matter of “when” rather than “if,” it is critically important that small businesses be ready to get in line at the first opportunity.

If you have any questions, please contact me at (516) 393-8292 or

We have blogged extensively about the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act appropriated $349 billion to the PPP to fund government-backed loans to qualifying businesses to cover payroll costs, rent, mortgage interest and utilities. The full amount of principal may be forgiven for borrowers who comply with the PPP’s terms and conditions.

Although the PPP was scheduled to open to self-employed persons and independent contractors on April 10, 2020, the Department of the Treasury (Treasury) did not provide any guidance on this portion of the PPP until last night — the evening of April 14, 2020. The guidance takes the form of a new Interim Final Rule (two such rules were issued previously) entitled “Business Loan Program Temporary Changes; Paycheck Protection Program – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans” (Third Interim Final Rule or Rule).

Unfortunately, the Third Interim Final Rule belatedly provides information that will fundamentally change the way partnerships and limited liability companies complete PPP applications. For thousands of entities that have already received PPP loan proceeds, this means that much-needed money was left on the table.

The Rule also provides guidance as to how sole proprietors and independent contractors will determine their maximum loan amounts, and the types of supporting documentation they must submit with their PPP loan applications and forgiveness requests.

Partners and LLC Members Prohibited from Applying for PPP Loans Despite Being Self-Employed
The Third Interim Final Rule provides that a self-employed person is eligible for a PPP loan if the individual: (i) was in operation on February 15, 2020; (ii) had self-employment income; (iii) had a principal place of residence is in the United States; and (iv) filed or will file a Form 1040 Schedule C for 2019.

Significantly, however, the Third Interim Final Rule clarifies that partners and limited liability company (LLC) members (who elect partnership treatment for tax purposes) who ordinarily pay self-employment taxes may not submit individual PPP loan applications to cover their own compensation. Rather, the self-employment income of general active partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP loan application filed by or on behalf of the partnership or LLC.

According to SBA’s Administrator and the Secretary of the Treasury, it is necessary to limit “a partnership and its partners (and an LLC filing taxes as a partnership) to one PPP loan…to help ensure that as many eligible borrowers as possible obtain PPP loans before the statutory deadline of June 30, 2020.” Moreover, according to the Administrator, “permitting partners to apply as self-employed individuals would create unnecessary confusion regarding which entity, the partner or the partnership, applies for partner and LLC member income, and would generate loan proceeds use coordination and allocation issues. Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners.”

Having waited to issue this clarification until now amounts to a colossal failure by SBA and Treasury. Innumerable partnerships and limited liability companies were previously told by their lenders that they could not include partner income reported on IRS Form K-1 in calculating payroll costs. And, many of their PPP loans have already been approved and disbursed. The end result is that, while these businesses were able to finance their employees’ salaries, actively employed partners and LLC members were deprived of the opportunity to obtain assistance in paying their own compensation.

Since existing regulations permit an entity to take only one PPP loan, it appears there is no obvious recourse for partnerships and LLCs that find themselves in this situation. Whether PPP loans can be modified and extended or otherwise refinanced to address this problem remains to be seen.

Calculating Maximum Loan Amount as a Sole Proprietor or Independent Contractor
For independent contractors and sole proprietors who report their income on IRS Form 1040, Schedule C, the Rule sets out the methods for determining the maximum PPP loan amount. The method to be used depends on whether the applicant has employees.

Self-employed persons who do not have employees should use the following methodology:

  1. Find the net profit amount on 2019 IRS Form 1040, Schedule C, line 31 (if you have not yet filed a 2019 return, you must fill it out and compute the value). If this amount is over $100,000, reduce it to $100,000.
  2. Calculate the average monthly net profit amount (divide the amount from Step 1 by 12).
  3. Multiply the average monthly net profit amount from Step 2 by 2.5.
  4. Add the outstanding amount of any Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020 that is required to be refinanced, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Self-employed persons who have employees should use the following methodology:

  1. Compute 2019 payroll by adding the following:

a.  The net profit amount on the 2019 Form 1040, Schedule C, line 31 (if you have not yet filed a 2019 return, fill it out and compute the value), up to $100,000 annualized. If this amount is over $100,000, reduce it to $100,000.

b.  An amount equal to the 2019 gross wages and tips paid to employees, computed using 2019 IRS Form 941 Taxable Medicare wages & tips (line 5c- column 1) from each quarter, less any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States.

c.  2019 pre-tax employee (but not owner) contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips.

d. 2019 employer health insurance contributions (health insurance component of Form 1040, Schedule C, line 14), retirement contributions (Form 1040, Schedule C, line 19), and state and local taxes assessed on employee (but not owner) compensation (primarily under state laws commonly referred to as the State Unemployment Tax Act or SUTA from state quarterly wage reporting forms).

2. Calculate the average monthly amount (divide the amount from Step 1 by 12).

3. Multiply the average monthly amount from Step 2 by 2.5.

4. Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that is required to be refinanced, less the amount of any advance under an EIDL COVID-19 loan (because it does not have to be repaid).

Supporting Materials

Self-employed persons applying for a PPP loan must provide a 2019 IRS Form 1040, Schedule C with their PPP loan application. This is true even if the individual has not yet filed a tax return with the IRS. Additionally, a 2019 IRS Form 1099-MISC detailing non-employee compensation must be provided where applicable, along with an invoice, bank statement, or book of record that proves that the business was in operation on or around February 15, 2020.

Additionally, those who have employees must provide Form 941 (or other tax forms or equivalent payroll processor records containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or equivalent payroll processor records, along with evidence of any retirement and health insurance contributions, if applicable. A payroll statement or similar documentation from the pay period that covered February 15, 2020 must also be provided to establish that the business was in operation on February 15, 2020.

Use of PPP Loan Proceeds by Self-Employed Persons

According to the Third Interim Final Rule, when paid to someone who is self-employed, PPP loan proceeds can be used for the following expenditures:

  1. “Owner compensation replacement” — according to the Rule, this will be 8/52 of the amount of net profit received in 2019 according to IRS Form 1040, Schedule C.
  2. Employee payroll costs (as defined in the First Interim Final Rule) for employees whose principal place of residence is in the United States, if any.
  3. Interest payments on debt obligations that were incurred prior to February 15, 2020.
  4. Refinancing an EIDL loan taken between January 1, 2020 and April 3, 2020.
  5. The following expenditures, but only if the individual claimed or would be entitled to claim a deduction on his/her 2019 IRS Form 1040, Schedule C:

a. Mortgage interest payments on any business mortgage obligation on real property (e.g., a warehouse in which to store supplies) or personal property (e.g., a car utilized by the business).

b. Business rent payments, which includes vehicle lease payments.

c. Business utility payments, which may include the cost of gasoline for business travel.

Loan Forgiveness

To the extent that a self-employed individual utilizes PPP loan proceeds to pay the following expenses during the eight weeks after the loan originates, the entire amount of principal and accrued interest is eligible for forgiveness.

  1. Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums).
  2. Owner compensation replacement limited to an amount that is equal to 8/52 of 2019 net profit as set forth in the 2019 IRS Form 1040, Schedule C, but excluding any amount of paid sick or family leave for which a refundable payroll tax credit is claimed under the Families First Coronavirus Response Act.
  3. Payments of mortgage interest on mortgages that were in force before February 15, 2020 on real or personal property so long as they are  deductible on Form 1040 Schedule C.
  4. Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C.
  5. Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C.

As in the case of other businesses, self-employed individuals must use at least 75% of PPP loan proceeds on payroll costs, including owner compensation replacement, in order to qualify for forgiveness.

In order to apply for forgiveness, self-employed individuals will be required to submit:

  1. A borrower certification.
  2. Evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period, if applicable.
  3. The 2019 Form 1040, Schedule C that was provided at the time of the PPP loan application, in order to determine the amount of net profit allocated to the owner for the eight-week covered period.
  4. Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions), if the business has employees.

Other Provisions

The Third Interim Final Rule also clarifies the eligibility of certain businesses to obtain PPP loans. Specifically, eligible businesses owned (in whole or part) by an individual who is a director of a PPP lender, or who owns an interest of less than 30 percent in a PPP lender, may obtain a loan from that PPP lender. Such eligible businesses must, however, follow the same processes as any similarly situated customer, and the PPP lender may not give those businesses’ applications any type of priority. The PPP lender also must comply with any applicable state or local laws, or its own internal policies, applicable to such transactions.

The above exception does not apply where the business owner is not simply a director or minority owner of a PPP lender, but is an officer or key employee of the PPP lender. Where the owner of an eligible business is also an officer of a key employee of a PPP lender, the eligible business can not obtain a loan from that PPP lender, although it may obtain a PPP loan from a different lender.

Additionally, a business that receives revenue from legal gambling is eligible for a PPP loan if it meets the existing standards of 13 CFR 120.110(g), or:

  1. The business’s legal gaming revenue (net of payouts but not other expenses) did not exceed $1 million in 2019; and
  2. Legal gaming revenue (net of payouts but not other expenses) comprised less than 50 percent of the business’s total revenue in 2019.


While the Third Interim Final Rule provides welcome guidance for sole proprietors and independent contractors seeking PPP loans, it also exposes a significant flaw in the PPP roll-out. The earlier lack of clarity about whether the term “payroll costs” encompassed owner income reported on IRS Form K-1 has undoubtedly left many partners and LLC members with PPP loans that covered their employees’ salaries but not their own compensation. One can only hope this issue will be addressed in subsequent rule-making or anticipated legislation that increases funding for the PPP.

If you have any questions about the PPP, please contact me at (516) 393-8292 or