SBA Releases Additional Guidance on Loan Forgiveness RequirementsAugust 27, 2020
On August 24, 2020, the U.S. Small Business Administration (SBA) published a new Interim Final Rule with respect to the amount of expenses borrowers can count towards forgiveness of their Paycheck Protection Program (PPP) loans. Following is a summary of the forgiveness requirements.
Owner-Employee De Minimis Rule
The SBA has further defined “owner-employees” to mean any shareholder of a C or S Corporation that owns 5% or more of the corporation’s outstanding stock. An owner-employee with less than 5% interest in a C or S Corporation is not subject to the owner-employee compensation limits previously released. This exception only applies to corporate entities and does not provide an exception for partnerships or limited liability companies. Owner-employee compensation for the purpose of PPP loan forgiveness is capped based on 2019 compensation or a set dollar amount. However, no guidance on ownership attribution rules was provided.
Tenant-Subtenant and Household Costs Not Allowable
Forgivable non-payroll costs do not include costs attributed to a sub-tenant of the borrower or household expenses of the borrower that are unrelated to the operation of the business. For instance, a borrower who leases a building for $10,000 a month and subleases 30% of it to a third party may only include 70% of the rent paid or incurred during the applicable 8- or 24-week period as a forgivable cost. Also, proprietors who work from home may only deduct rent, mortgage interest and utility costs “in the same manner as the borrower’s 2019 tax filings,” presumably with regard to how those expenses were reported on their 2019 Form 8829. Borrowers who did not claim business use of home expenses on Form 8829 on their 2019 tax return may not claim any such expenses as forgivable costs.
Limits on Rent and Interest Paid to Related Parties
There are now limitations on the amount of rental expense that can qualify for forgiveness when payments are made to a related party. Rents paid to a related party (no definition of related party is provided) during the applicable 8- or 24-week period are eligible for forgiveness only to the extent that they do not exceed interest paid on any mortgage secured by the property that is used by the business. In other words, if a PPP borrower leases a building from a related party, forgiveness on rent paid to the related party is available only to the extent that the related party paid interest on a mortgage secured by the property during the applicable period. Only interest payments, and not principal payments, taxes, etc., are eligible. If there is no mortgage on the property, none of the rent is eligible for forgiveness. The general rule that no more than 40% of forgivable PPP costs may consist of non-payroll costs still applies.
Finally, mortgage interest payments to a related party are not eligible for forgiveness.
Marks Paneth will continue to monitor developments and will provide updates as they become available. Contact your Marks Paneth advisor if you need additional information or assistance or email firstname.lastname@example.org.
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