The Small Business Administration (“SBA”) has issued an interim final rule (“Rule”) concerning Paycheck Protection Program (“PPP”) loan forgiveness. Specifically, the Rule addresses the ownership percentage that triggers the owner-employee compensation rules, and limitations on the eligibility of certain nonpayroll costs for forgiveness.
Owner-Employee Compensation Rules
Previous SBA guidance provided that the compensation of owner-employees of an S Corporation or C Corporation was capped at 15.385% of their 2019 compensation if the borrower elected to use an 8-week covered period, and 20.833% of their 2019 compensation if the borrower elected to use a 24-week covered period.
The Rule clarifies that owner-employees that have less than a 5% ownership stake in an S Corporation or C Corporation are to be treated as employees, and therefore are not subject to the owner-employee compensation rule. Note that this portion of the Rule specifically applies to S Corporations and C Corporations.
Eligibility of Nonpayroll Costs for PPP Loan Forgiveness
The Rule states that the nonpayroll costs of a borrower’s tenant or subtenant may not be included in the amount of loan forgiveness. Further, the Rule requires a borrower that works out of his or her home to prorate the applicable household expenses. The Rule provides several examples illustrating how this part of the Rule applies, including the following:
- 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.
- 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.
The Rule addresses loan forgiveness eligibility of rent payments to a related party. The Rule provides that rent payments made to a related party are only eligible for forgiveness if the following two conditions are satisfied: (1) 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; and (2) the lease and the mortgage were entered into prior to February 15, 2020.
Interestingly, the SBA defines a related party to mean “any ownership in common between the business and the property owner” (emphasis added). Finally, any mortgage interest payments to a related entity are not eligible for forgiveness.
The SBA continues to release additional guidance regarding borrower eligibility for PPP loan forgiveness. FOS attorneys will continue to monitor the SBA’s changes and provide updates for the same. Contact your FOS attorney if you need guidance or have any questions related the Paycheck Protection Program loan forgiveness procedures and requirements.