Barry L. Sunshine
CPA | Senior Tax Partner
485 Madison Avenue | New York | NY 10022
Some PPP updates -
The U.S. Small Business Administration (SBA) released more guidance on the PPP and forgiveness – we would consider them more of clarifications rather than new rules:
1) Certain individuals are exempt from owner-employee compensation limits - Under this clarification, owner-employees that own less than a 5 percent (5%) ownership in a C or S corporation are not subject to the owner-employee compensation limitation. Previously, it was believed that all C and S corporate owners were subject to the owner-employee compensation limit.
2) Having tenants (or sub-tenants) can impact the eligibility of certain non-payroll costs – the amount of rent expense that is allowable to be forgiven must be reduced by the amount that any tenants or sub-tenants pay the borrower in rent. For example, if a borrower rents an office building for $10,000 per month and subleases out a portion of the space to another business for $2,500 per month, then 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 percentage 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.
3) There is a limitation on related party rent when applying for loan forgiveness. Previously there has been no guidance when rent is paid to a related landlord from the borrower. 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.
We have been receiving a fair number of calls from PPP borrowers, asking us when can they apply for forgiveness. Generally, a borrower applies for forgiveness with the bank (or lending facility) that provided the PPP loan. Currently, many of the large banks aren’t yet accepting forgiveness applications, but they are starting to open their portals and allowing borrowers to register for forgiveness. One bank has reported to us that they will start accepting forgiveness application around September 15th. Generally, we are recommending to hold off filing as we expect some more law changes that will benefit companies. There maybe valid business reasons for filing sooner than later, so you will need to evaluate whether the business reasons truly outweighs the reasons to wait.
FICA deferral for employee’s payroll -
Lastly, in early August, the president signed an executive order allowing employer’s not to withhold employee’s FICA tax. Many employers and payroll service companies didn’t know how to comply with these rules until the treasury department issues guidance. Well, they issued Tax Notice 2020-65, and this allows an employer to opt in and pay affected employees their share of the FICA tax and include it in their paychecks. If an employer elects to follow these rules, only affected employees making $4,000 or less per biweekly pay period (or equivalent) can take advantage of these rules. This is for payroll paid to employees from September 1, 2020 until December 31, 2020. The affected employee must start paying back the deferred FICA taxes starting January 1, 2021 through April 30, 2021. If not paid by April 30th, the interest, penalties and additions to tax applies. Questions still remain, such as how does an employer recover the FICA tax to remit to the IRS if the employee no longer is employed with the company.
Many companies are in the home stretch in the PPP program and there is much to review and plan to obtain maximize forgiveness. Also, there are many questions still unanswered with respect to the paycheck protection program and this new rule allowing employees to defer their FICA tax. If you have any questions, please let us know.