Three Important Clarifications in the SBA’s August 24th Interim Final Rule for PPP
August 26, 2020
On August 24, 2020, the U.S. Small Business Administration (SBA) released another update to the Paycheck Protection Program (PPP), the Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs.
Included in the latest guidance are three notable clarifications from prior guidance impacting PPP loan borrowers:
1) Certain individuals are exempt from owner-employee compensation limits;
2) Having tenants (or sub-tenants) can impact the eligibility of certain non-payroll costs; and
3) Limitations on related party rent when applying for loan forgiveness.
Exemptions from owner-employee compensation limits for C- or S- Corporations
Under this new guidance, owner-employees with less than a 5 percent (5%) ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule. Earlier guidance capped the amount of loan forgiveness for payroll compensation attributable to an owner-employee without regard to the amount of ownership stake they had in the business.
This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
How having a tenant can impact the eligibility of certain non-payroll costs for loan forgiveness
The amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower. For example, 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.
In another example, 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.
Limitations on related party rent for loan forgiveness
Until this latest release, the SBA had not explicitly addressed related party lease agreements. Under this new guidance, rent or lease payments paid to a related party are eligible for loan forgiveness to the extent that the amount of loan forgiveness requested 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. While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.
The SBA further noted that 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.
Let Aprio Help
Aprio has established a dedicated PPP loan forgiveness team that is continuously monitoring new guidance from the SBA, as well as the Treasury, Congress and the IRS, to ensure we have the latest information when advising our clients.
If you would like to discuss how to interpret these new requirements and accurately complete your forgiveness application to maximize PPP loan forgiveness, contact Aprio’s dedicated PPP loan forgiveness team for a consultation.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.