Bruce Claassen

August 26, 2020

On Monday, the U.S. Small Business Administration (SBA) and Treasury issued an interim final rule which addresses Paycheck Protection Program Loan (PPPL) forgiveness issues related to owner-employee compensation and the eligibility of certain nonpayroll costs.

 

The interim final rule specifically establishes that an owner-employee with less than a 5% ownership stake in a C or S corporation is exempt from the rule which limits the amount of owner-employee compensation which can be taken into account when determining the amount of their compensation for loan forgiveness. 

 

The interim final rule also confirms how related-party property rentals affect forgiveness - something many have been curious about because the CARES act and subsequent guidance has been strangely silent on the issue.  SBA and Treasury have said that these rules are designed to maintain equitable treatment between a business owner that holds commercial property in a separate entity and one that holds the property in the same entity as its business operations.

 

The guidance also declares that the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or subtenant of the PPP borrower.

The guidance illustrates this with four examples.

Example 1: A borrower rents an office building for $10,000 per month and subleases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.

Example 2: 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 mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value (FMV) of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the FMV of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.

Example 3: 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.

Example 4: 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.

 

In the other decision regarding certain nonpayroll costs, the guidance indicates that rent or lease payments to a related party are eligible for loan forgiveness provided that

(1) the amount of loan forgiveness requested for those payments 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, and

(2) the lease and the mortgage were entered into prior to Feb. 15, 2020.

 

The borrower will be required to provide mortgage documents to confirm the interest paid, as well as the start date of the mortgage.

 

Mortgage interest payments to a related party are not eligible for forgiveness, at all. The reasoning stated in the rule is that PPP loans are intended to help businesses cover nonpayroll costs owed to third parties, not payments to a business’s owner that occur because of how the business is structured.

 

This new round of guidance is significant and will affect the amount of forgiveness that many PPPL borrowers have been thinking they'd be eligible for.  Contact us if you think you will be impacted by the new interim final rules.  We are here to help you navigate the PPPL forgiveness maze!