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Editorial 9 MIN READ

Professional corporation, a 2020 field report

Two weeks into a different world, the PC shareholder-employee structure quietly reshapes a partnership question that was already settled

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 6 sections
  1. The PPP arithmetic, and why the entity form matters
  2. The § 199A and § 1202 picture has not moved
  3. The Social Security wage base, and a smaller thing that matters
  4. State law: the form itself has not changed
  5. What to do this week
  6. Sources

professional corporation that pays its shareholder-doctors on a W-2 is, as of last Friday, eligible to count those wages toward a Paycheck Protection Program loan. A medical partnership that pays its partners in distributive-share draws is not. That single asymmetry is the April 2020 story on the professional corporation, and it has walked a long-running tax question into a room it was not previously in.

The Coronavirus Aid, Relief, and Economic Security Act was signed March 27. PPP applications opened April 3. The country is two weeks into a shutdown that has closed every dental chair, every non-urgent operating room, and most of the exam rooms that cannot be moved to a video call. What follows is a field report from inside that two-week window, written for a reader who already knows what a PC is and wants to know what the form is doing right now.

The PPP arithmetic, and why the entity form matters

PPP loans are sized at 2.5 times average monthly payroll, capped at $10 million, with payroll defined in § 1102 of the CARES Act (Pub. L. 116-136) and in SBA Interim Final Rules published the first week of April. Payroll costs include W-2 wages up to an annualized $100,000 per employee, employer health-insurance contributions, employer retirement contributions, and state and local payroll taxes. Forgiveness rides on the borrower spending at least 75% of the loan on payroll over the eight-week covered period.

For a professional corporation that has elected S-corp tax treatment, the shareholder-physicians are employees of the entity. Their W-2 wages show up on the payroll register, on the quarterly 941s, on the state withholding returns. They count. The corporation can include the lesser of each shareholder's actual salary or $100,000 annualized in the loan-sizing calculation and in the forgiveness calculation.

For a general partnership of physicians, or a medical LLC taxed as a partnership, the partners are not employees. They take distributive-share draws, pay self-employment tax on net earnings from self-employment, and receive a K-1. The first round of SBA guidance, issued April 2 and clarified in the April 3 Interim Final Rule, treats partner compensation as self-employment income reported on the partnership's single loan application, not as payroll. Partnerships cannot file separate PPP applications for each partner. The partnership files once, and the partners' earnings are included as a capped self-employment component rather than as W-2 wages.

In practice, a four-doctor PC that pays each shareholder a $250,000 W-2 salary is sizing its loan against roughly $400,000 in capped wages (the $100,000-per-employee cap on each of four) plus health, retirement, and staff payroll. A four-doctor partnership with identical economics is sizing against the partners' 2019 Schedule K-1 self-employment earnings, capped equivalently but without the ability to split into four employee slots, and with live uncertainty about the exact methodology in the first wave of lender interpretation. Same practice, same revenue, different entity choice made years ago, meaningfully different April 2020 outcome.

None of this was on anyone's checklist when the entity was picked. It is the sort of path-dependence that the 2018 revisit warned about in a different register: the PC looks inert for years, and then a specific regime change rewards or punishes the structural choice retroactively. The 2020 version of that warning is that the PC's mandatory W-2 treatment of working shareholders, previously an administrative chore, is the thing that makes the paycheck protection loan mechanically available.

The § 199A and § 1202 picture has not moved

The CARES Act did not touch § 199A. It did not touch § 1202. The 2017 framing that the 2016 original set up and the 2018 revisit refined still holds on the tax side, and it is worth restating precisely now because some of the COVID commentary is getting the edges wrong.

Section 199A(d)(2) excludes specified service trades or businesses from the 20% pass-through deduction above the taxable-income phase-out. For 2020, the thresholds under Rev. Proc. 2019-44 are $163,300 for single filers and $326,600 for joint filers, with a $50,000 single and $100,000 joint phase-in band. An SSTB includes "the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners." A dermatology practice, a personal-injury firm, a CPA shop, a wealth manager: all SSTB. Above the joint threshold, the 20% deduction is gone.

Section 1202, the qualified small business stock exclusion, is available only for C-corporation stock held more than five years. A PC that operates as an S-corp cannot issue QSBS. A PC that operates as a C-corp can, subject to the statutory gates in IRC § 1202(c) and (e). Among those gates is § 1202(e)(3), which disqualifies a trade or business in which the principal asset is the reputation or skill of its employees, plus specific exclusions for health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business involving the performance of services. In plain English, a professional corporation whose reason for existing is the licensed work of its shareholders is structurally ineligible for QSBS. The five-year C-corp play is not available to dentists and dermatologists on the facts, even when it is technically available on the form.

What this means in 2020 is that the two big federal tax upsides that a C-corp PC can sometimes offer on paper, a 21% flat rate under IRC § 11(b) and a potential QSBS exclusion, do not run for the licensed-services population. The medical group is still picking between S-corp pass-through with SSTB exposure above the threshold, and C-corp double taxation with 21% at the entity level and ordinary rates on distributions. For high-earning shareholder-physicians, neither choice is clean. The 2019 field report on the PLLC side of the same question walked the same ground and came out the same way.

The Social Security wage base, and a smaller thing that matters

The 2020 Social Security wage base is $137,700, up from $132,900 in 2019, per Social Security Administration announcements in October 2019. For a PC shareholder-physician paid a $300,000 W-2 salary, the employer-side Social Security tax runs on the first $137,700, for a maximum employer FICA of roughly $8,537 on the Social Security portion, plus 1.45% Medicare with no cap, plus 0.9% Additional Medicare on wages over $200,000 single or $250,000 joint under IRC § 3101(b)(2). None of these numbers are new. What is new is that, as of April 3, all of those employer-paid payroll taxes are eligible for deferral under CARES § 2302 through the end of 2020, with half due by December 31, 2021, and half due by December 31, 2022. PPP borrowers were initially thought to lose this deferral benefit at the forgiveness date; SBA and Treasury guidance on that interaction is still being issued this week. File the 941 conservatively, and assume the position may tighten.

The practical consequence for a PC in April 2020 is that the payroll-tax cash outflow for shareholder-employees, which has always been the largest single tax cost of the S-corp PC structure, is temporarily deferrable. That is not a savings, because the liability still accrues; it is a liquidity move, and in the current environment liquidity is the question.

State law: the form itself has not changed

California Corporations Code §§ 13400-13410 still defines the California professional corporation; §§ 13406 through 13408 still restrict ownership to licensed persons in the relevant profession and require the entity name to include "Professional Corporation" or an approved abbreviation. New York Business Corporation Law § 1505 still imposes personal liability on the shareholder for their own professional conduct and that of persons under their direct supervision and control, notwithstanding incorporation; § 1503 still requires the shareholder's license and the certificate-of- good-standing filing with the Education Department at formation. Illinois 805 ILCS 185/ still carries the Professional Service Corporation Act with its dual requirement of a regulatory certificate and a Secretary of State filing. None of this moved in March. None of it is expected to move in Q2.

What did move, in a quieter way, is that several state licensing boards have issued emergency orders loosening telehealth requirements, relaxing cross-state practice rules, and extending CE deadlines. These are not entity-level changes; they are professional-practice changes that happen to affect how the PC's licensed owners can bill. If your PC is licensed in California and your patients have moved across state lines, the cross-state rules matter more in April than they did in February. The PC framework is untouched. The license stack on top of it is in flux.

What to do this week

For an existing PC that has filed its PPP application, the answer is to keep running payroll on the schedule you were running it on, document the eight-week covered period carefully starting from the loan disbursement date, and resist the instinct to bump shareholder salaries to max out the forgivable amount. The $100,000 annualized cap is per employee, which limits the exposure, and the current SBA FAQ signals that significant mid-stream raises will be scrutinized.

For a PC that has not yet applied, apply. The April 3 opening was underwhelming in many markets because lenders were not ready; the week of April 6 is when capacity is arriving. The program is first-come, first-served against a $349 billion appropriation, and congressional discussion of a top-up is active but not yet law.

For a partnership or LLC of licensed professionals weighing whether to convert to a PC on the back of the PPP differential: do not convert for this. The asymmetry is real, but the loan program is eight weeks of forgivable payroll against a structural choice that affects everything downstream. If you were going to become an S-corp PC for the payroll-tax and retirement reasons, do it on the normal timetable; if you were not, this is not the reason.

The deeper point, and the thing the 2018 revisit pointed at without being able to name: the professional corporation is a form whose value is discovered in episodes. Most of the time it is indistinguishable from a PLLC taxed the same way. Then a specific regime change, a TCJA, a CARES Act, a state licensing emergency, asks a specific question of the structure, and the PC answers it differently from the alternatives. The 2020 question is about W-2 wages, and the PC answers well. The next question will be something else.

Sources

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