Three Important Clarifications in the SBA’s August 24th Interim Final Rule for PPP|
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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.
Disclaimer for services provided relative to SBA programs and the CARES Act
Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
In situations where resources are provided by third parties, those services should be covered under a separate agreement directly with that service provider. Aprio is not responsible for the actions of any other third party.
Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.