The U.S. Small Business Administration released new guidance Aug. 24 regarding the treatment of business owners and forgiveness of certain non-payroll costs under the Paycheck Protection Program.
The new rule provides additional guidance concerning the ownership percentage that triggers the applicability of the owner compensation rule for forgiveness purposes and limitations on the eligibility of certain non-payroll costs for forgiveness.
Under the new rule, owner-employees with less than a 5% ownership interest in a C- or S- Corporation are not subject to the owner-employee compensation rule.
The new exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are used.
Under previous loan forgiveness rules, the amount of loan forgiveness for payroll compensation for an owner-employee was capped regardless of the percentage of ownership.
The new rule also clarifies that amounts attributable to the business operations of a tenant or subtenant of a PPP borrower are not eligible for loan forgiveness.
The examples below illustrate this rule.
- 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 of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value 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.
For home-based businesses, household expenses are not eligible for loan forgiveness.
For example, in the case of a borrower working out of their 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.
Also covered in the new rules is the issue of whether rent payments to a related party—a party with common ownership in both the business and the property—are eligible for loan forgiveness.
Under the new rule, rent payments to related parties are eligible for loan forgiveness as long as (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. The borrower must provide its lender with mortgage interest documentation to substantiate.
However, while rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible.
This is because PPP loans are intended to help businesses cover certain non-payroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured.
The intent of this rule is 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 is expected to provide further guidance on PPP loan forgiveness.
For more information, contact CBIA's Brian Corvo (860.244.1169).