On Aug. 24, the Small Business Administration (SBA) and Treasury issued the latest interim final rule update to the Paycheck Protection Program (PPP) that seeks to clarify guidance related to owner-employee compensation and non-payroll costs. This guidance has been long-awaited and clears up several questions borrowers have had about forgiveness. Here are the main points:
1. Owner-employees of C or S corporations are exempt from the PPP owner-employee compensation rule for loan forgiveness if they have a less than 5% stake in the business. The intent is to provide forgiveness for compensation of owner-employees who do not have a considerable or meaningful ability to influence decisions over loan allocations. This clarifies earlier guidance that capped the owner-employee compensation regardless of what stake they have in the business.
2. Loan forgiveness for non-payroll costs may not include amounts attributable to the business operation of a tenant or subtenant of the PPP borrower. The SBA provides a few examples of what this means:
- Borrowers renting an office building and subletting a portion to another business can only claim the difference between their rental cost and the sublet income.
- Borrowers with a mortgage on the building in which it operates who lease a portion of the building to another business can only claim a portion of the mortgage interest limited to the percent share of fair market value of the space not leased.
- Borrowers sharing rented space with another business must prorate rent and utility payments like they would for 2019 tax filings or, if new, expected 2020 tax filings.
- Borrowers working from home may only claim the share of covered expenses deductible on the 2019 tax filings or, if new, expected 2020 tax filings.
3. To achieve loan forgiveness on rent or lease payments to a related third-party, borrowers must ensure that (1) the amount of loan forgiveness requested does not exceed the amount of mortgage interest owed on the property attributable to the business’s rented space during the covered period, and (2) the lease and mortgage meet the Feb. 15, 2020, requirement for establishment. Earlier guidance had not addressed related third-party leases.
It’s important to note that mortgage interest payments to a related party are not eligible for forgiveness as PPP loans are not intended to cover payments to a business’s owner because of how the business is structured – they are intended to help businesses cover non-payroll costs owed to third parties.
For questions on any of these rules or assistance with your PPP loan forgiveness application, contact us today.