August 27, 2020
SBA Releases PPP Loan Forgiveness Interim Final Rule
The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act established the Paycheck Protection Program (“PPP”) that provided loans for qualifying small businesses. Under the CARES Act, proceeds received by a borrower from a PPP loan may be forgiven if the borrower uses the proceeds to pay specified expenses (including payroll costs, interest on qualified mortgage indebtedness, rent under a qualified lease contract, and qualified utilities) during a “covered period” beginning on the loan date.
On August 24, the U.S. Small Business Administration (“SBA”) released an interim final rule (“IFR”) providing guidance for the treatment of certain expenses in the PPP loan forgiveness process. The new guidance provided by the IFR includes:
- The owner-employee forgiveness limitation does not apply to compensation paid to owner-employees holding less than a 5% ownership interest in a Subchapter C or Subchapter S corporation.
- Rent expense attributable to a sublease cannot be forgiven. For example, a borrower that pays $10,000 a month in rent and subleases a portion of its space for $2,500 a month may only have $7,500 a month of rent forgiven.
- Eligible mortgage interest paid by a building owner may only be forgiven up to the ratable share of the fair market value of the building that is not rented to tenants. Similar rules apply to the proration of utility costs.
- Rent expense paid to a related party may qualify for forgiveness if the amount of loan forgiveness requested does not exceed the mortgage on the rented property in the covered period and both the underlying lease and the mortgage contract were entered into before February 15, 2020. Mortgage interest paid to a related party is not eligible for forgiveness.
No IRS Guidance for Trump Payroll Tax Deferral Executive Order
On August 8, President Trump issued an executive action directing the Treasury Department to defer the withholding and payment of the employee portion of FICA tax. The order applies to wages paid from September 1, 2020 to December 31, 2020 to employees earning less than $4,000 on a bi-weekly basis.
The executive order requires the Treasury to provide guidance regarding the detailed rules and practical application of the payroll tax deferral. However, as of the date of this tax alert, no guidance has been issued by the Treasury Department. The lack of guidance leaves several unanswered questions regarding the deferral, including whether the deferral is elective or mandatory, whether the employer or employee is responsible for the eventual repayment of the taxes, and how employers should determine eligible wages and report the deferral. Given the lack of guidance, employers should consider delaying the implementation of these rules until guidance is issued.
Whitley Penn is continually monitoring the tax and economic developments related to the coronavirus pandemic and will send out additional alerts in the future. In the interim, please contact your Whitley Penn tax advisor if you have any questions or require any additional information.