The SBA’s recently released Interim Final Rule dated August 24th clarifies PPP Loan forgiveness rules regarding the following:
- Compensation paid to owner-employees
- Payment of rent to a related party
- Payment of non-payroll expenses for a tenant or sub-tenant of the borrower
- Payment of non-payroll expenses for a home-based business
Compensation paid to owner-employees – Prior SBA Interim Final Rules capped the amount of loan forgiveness for compensation paid to an owner-employee; however, “owner-employee” was not defined. This new Interim Final Rule clarifies that owner-employees of C-corporations or S-corporations are not subject to the owner-employee compensation PPP forgiveness limitation if they own less than 5% of the company. Conversely, any owner-employee who owns 5% or more of the company is subject to the limitation. The SBA/Treasury’s reasoning is that owner-employees who own less than 5% “have no meaningful ability to influence decisions over how loan proceeds are allocated.”
Payment of rent to a related party – PPP loan forgiveness for rent paid to a related party is limited to “the amount of mortgage interest owed on the property that is attributable to the space being rented by the business” seeking loan forgiveness. Both the related party lease and business property mortgage loan must have been in place prior to February 15, 2020. The rule also states that “Any ownership in common between the business and the property owner is a related party for these purposes.”
Since only the interest on the mortgage loan is eligible for forgiveness, this rule penalizes related party property owners who have paid off, or significantly paid down, the mortgage loans on real estate leased to the related business. The rule also requires related party property owners with multiple tenants in a building that includes the related party’s business to prorate the amount of “rent” that figures in the forgiveness calculation.
Finally, mortgage interest payments to a related party are not eligible for forgiveness. For example, if a business owner made a mortgage loan to his or her business so that the business could purchase real property, the interest paid to the related party business owner by the company is not an eligible cost for calculation of forgiveness.
Payment of non-payroll expenses for a tenant or sub-tenant of a PPP borrower – Expenses attributable to the business operation of a tenant or sub-tenant are not eligible for forgiveness. For example, if a PPP borrower subleases part of their business property, the proportional share of the lease payment to the PPP borrower’s landlord attributable to the sublease is not an eligible cost for calculation of forgiveness. Or, if PPP borrower has a mortgage on their business property and subleases a portion of the property the mortgage interest attributable to the sublease is not an eligible cost for calculation of forgiveness.
Payment of non-payroll expenses for a home-based business – If a borrower works out of their home, only the share of non-payroll covered expenses that were deductible on the borrower’s 2019 tax return (or expected on their 2020 return if a new business) are eligible for calculation of forgiveness.
You can find the full text of the Interim Final Rule HERE.