On August 25, 2020, the U.S. Small Business Administration (SBA) and Treasury issued an interim final rule addressing Paycheck Protection Program (PPP) forgiveness concerns related to owner-employee compensation and nonpayroll costs eligibility. More specifically, the guidance provides a 5% threshold for determining C and S corporation employee ownership and adds potentially significant limitations on amounts eligible for forgiveness related to rent and lease agreements.
Outlined below are some of the key takeaways from the latest guidance.
C and S Corporation owner-employees
Compensation paid to employees with less than a 5% ownership stake in a C or S corporation will be exempt of the more stringent forgiveness limitations. With the exemption, the SBA intends to cover “owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.”
However, it is unknown whether this exception also applies to noncash compensation paid to such owner-employees. Pursuant to a previous interim rule, payments for noncash compensation are not forgivable if included in the owner-employee’s wages (as a matter of general tax principles). For example, health insurance premiums paid on behalf of an S corporation employee would be included in their wages if their ownership stake in the business was greater than 2% and, thus, these premiums would not be eligible for forgiveness. We expect further guidance on this issue.
Nonpayroll costs attributable to borrower’s tenant or subtenant
In the interim rule clarifies that PPP loan forgiveness applications cannot include costs attributable to tenants or subtenants of the borrower. This is part of an effort 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.
For example, a PPP borrower who rents office space for $10,000 per month and subleases a portion of the space to another business for $2,500 per month will only be eligible for $7,500 of forgiveness.
This limitation also applies to any mortgage interest or utility expenses attributable to the subtenant. Finally, loan forgiveness may not include household expenses associated with home-based businesses. Deductible home-office expenses only qualify to the extent they were deductible on 2019 tax filings (or expected 2020 tax filings, if a new business).
Rent and mortgage interest payments
The SBA also ruled that rent or lease payments to a related party are eligible for loan forgiveness under two conditions: (1) the amount of loan forgiveness requested for those payments cannot exceed the amount of mortgage interest owned on the property during the covered period that is attributable to the space being rented by the business, and (2) the lease and mortgage were entered into prior to February 15, 2020. Note that this rule may prove to be particularly problematic as some businesses rent from related-party owners that do not have a mortgage on the property.
For these purpose, the rule considers any common ownership between the business and the property owner as constituting a related party, with no de minimis exception. Conversely, mortgage interest paid to a related party is not eligible for forgiveness. The SBA explains that the intention of the PPP is to cover certain nonpayroll-related payments owned to third parties and should not apply to payments that arise merely due to the structure of the business.
How can Squar Milner help?
As new guidance continues to come out, our team of PPP loan forgiveness experts are monitoring and assessing each bit of new information. Our experts stand well-prepared to work with you on optimizing your PPP loan forgiveness and helping your business stay on track during these uncertain times.
For more information on how the latest guidance may impact your personal PPP loan forgiveness situation, please contact your Squar Milner tax advisor or get in touch with our PPP experts. Please also consider our available PPP services to find out how Squar Milner can best serve you.
Still have questions about how the Payment Protection Program applies to your specific business?
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.