New PPP Forgiveness Guidance – Owner-Employee Forgiveness, Rent-Related Costs

The Treasury and U.S. Small Business Administration (SBA) released an interim final rule Monday, August 24th, addressing Paycheck Protection Program (PPP) forgiveness issues related to owner-employee compensation and the eligibility of nonpayroll costs.  Specifically, the new guidelines state that an owner-employee in a C- or S-corporation who has less than a 5% ownership stake will not be subject to the owner-employee compensation rule, which caps the amount of loan forgiveness on owner-employee compensation. The exemption’s intent is to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated, according to the interim final rule.

The current Paycheck Protection Program Forgiveness Application asks all borrowers to certify as follows:

• if a 24-week Covered Period applies, the forgiveness amount requested does not exceed 2.5 months’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $20,833 per individual; and
• if the Borrower has elected an 8-week Covered Period, the forgiveness amount requested does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.

This change means that the $20,833 cap for a 24 week period does not apply to C Corp and S Corp shareholders that own 5% or less of the Company. For a 5% shareholder, the cap on wages for 24 weeks is now $46,153 which is the same as all other employees.

Non-payroll Costs Guidance

The guidance also makes changes that the SBA and Treasury said are designed to maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.

The SBA and Treasury have declared 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.

Rent, Lease and Mortgage Interest Payments to Related Parties

The SBA and Treasury have stated 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.

This is a major change to the related party rules. Before there was no limitation on the rent paid to a related party that could qualify for forgiveness as long as it was a fair market rent. This change applies a look-through rule to space leased from a related party, capping eligible expenses based only on the mortgage interest owed on the property during the covered period. The IFR limits the amount of rent or lease payments made to a related party that are eligible for loan forgiveness to “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,” This means that if the related party that owns the building that does not have a mortgage, then no rent would be forgiven irrespective if it was fair market rent.

Mortgage interest payments to a related party are not eligible for forgiveness. Per the ruling, 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.

We will continue to monitor this situation and provide timely updates as information becomes available. If you have any questions about the recent PPP Guidance or how it may impact you or your business please contact your ALL tax advisor or call us at 617-738-5200.

Sources: AICPA, SBA, Journal of Accountancy