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The Small Business Administration has released a new Paycheck Protection Program Interim Final Rule (IFR). In addition to supplementing previous interim final rules that implement the Paycheck Protection Program, this latest IFR addresses and clarifies the deductibility of certain costs, including related-party rent and owner-employee compensation.
Question: Are rent payments to a related party eligible for loan forgiveness?
Yes; however, there are some limits. The amount of PPP loan forgiveness requested for rent or lease payments to a related party may not exceed the amount of mortgage interest owed on the property during the Covered Period. Additionally, the existing lease and the associated mortgage must have been entered into prior to February 15, 2020.
The IFR defines "related party" to mean any ownership in common between the business and the property owner.
It's important to note that mortgage interest payments to a related party are not eligible for forgiveness.
"PPP loans are intended to help businesses cover certain nonpayroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured," the IFR states. "This will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations."
Question: Are amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, in the context of home-based businesses, household expenses, eligible for forgiveness?
No, PPP borrowers are not eligible for forgiveness on nonpayroll costs that are paid by tenants or sub-tenants (or, for home-based businesses, household expenses). To illustrate this rule, the IFR includes several examples related to rent, shared space, and mortgage interest.
In general, when determining the amount of nonpayroll costs that are eligible for loan forgiveness, a borrower should only include the net amount paid for their own usage on their loan forgiveness application.
Question: Are any individuals with an ownership stake in a PPP borrower exempt from application of the PPP owner-employee compensation rule when determining the amount of their compensation that is eligible for loan forgiveness?
Yes. The IFR establishes that the compensation of certain business owners who have less than 5% ownership in a C-Corporation or S-Corporation are not subject to the owner-employee compensation limit for forgiveness.
This is a favorable change from the June 26, 2020, IFR issued by the SBA.
Under the old guidance, a borrower using the 24-week period was eligible to request loan forgiveness for owner-employees' payroll compensation up to only 2.5 months' worth of 2019 compensation or $20,833, in total, per individual, whichever was less.
Now, under the new IFR guidance, a corporation that has received a PPP loan and is using the 24-week covered period may include the salary and wages of employee-owners with less than 5% ownership for the full 24 weeks. The salary or wage is still limited to an annualized amount equal to $100,000, which will allow for an increase of $25,321 per employee-owner that meets the less than 5% ownership benchmark.