Further Clarity Provided on Forgiveness of PPP Loan Treatment of Owners and Other Nonpayroll Costs
On Monday August 24, 2020, the Small Business Administration (SBA) somewhat unexpectedly released a new Interim Final Rule (IFR) focused on loan forgiveness matters around treatment of owner’s compensation within the forgiveness application, as well as, clarification on forgiveness treatment of business operations of a tenant or sub-tenant and related party rent. A summary of these changes are provided below:
Five percent or less owners are now exempt from the owner’s compensation rules
Owner-employees with less than a five percent ownership stake in a C or S Corporation will not be subject to the owner-employee compensation rules. As outlined within previous IFR’s and the within the application itself, owner-employee compensation is capped at $15,385 for those choosing the 8-week covered period or $20,833 for those choosing the 24-week covered period. The SBA, in consultation with the Secretary of Treasury, has now determined that an owner-employee in a C or S Corporation who has less than a five percent ownership stake will not be subject to the owner-compensation rule. This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
It should be noted that this decision only covers owner-employees of C or S Corporations. This IRF is silent in regards to general partners who might have an ownership interest that is five percent or less.
Nonpayroll costs related to business operations of a tenant or sub-tenant are not forgivable costs
The SBA further clarified within this IFR that the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the Paycheck Protection Program (PPP) borrower or, for home-based businesses, household expenses. Examples provided by the SBA are:
- A borrower rents an office building for $10,000 per month and subleases out a portion of the space to another business for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
- A borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of the mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair value of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.
- A borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
- A borrower works out of his or her home. When determining the amount of nonpayroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
Related party rent is eligible for loan forgiveness
The SBA clarified that related party rent is forgivable as long as:
- The amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business.
- The lease and the mortgage were entered into prior to February 15, 2020.
Any ownership in common between the business and the property owner is a related party for these purposes
Some within the business and banking community, as well as accountants and other business and lending advisors, consider this IFR to be somewhat unexpected. The loan forgiveness applications submission process opened over two weeks ago and applications have since been submitted to banks and lending institutions. In some instances, while most likely minimal, applications have already been processed for forgiveness by those same banks and lending institutions and transmitted to the SBA for final approval. Banks and lending institutions have up to 60 days to review forgiveness applications and provide forgiveness approval to the borrower. Once that approval is provided, the forgiveness request must go to the SBA for final approval and funding of the loan to the bank or lending institution before the loan is completely resolved. The SBA has up to 90 days to complete this.
For assistance with completing a loan forgiveness application, interpretation of this new IFR or other rules pertaining to loan forgiveness, please contact David Blain, CPA, CVA – Partner and Director of Entrepreneurial Services at dblain@macpas.com or Mark Heath, CPA – Partner and Director of Tax Services at mheath@macpas.com.
Questions on submitting your PPP loan application or the forgiveness process?
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