Sean Bryan Authors Article on New Guidance for PPP Loan Forgiveness for Owner-Employees and Non-Payroll Items
On August 24, the SBA issued a new Interim Final Rule regarding forgiveness of Paycheck Protection Program loans. This guidance is late for those borrowers who borrowed in April, used an 8-week covered period ending in June, and have already applied for loan forgiveness. Payment on PPP loans generally does not begin until the forgiveness process is complete, so borrowers should not rush to apply for forgiveness, as Rules like this could affect the amount of the loan to be forgiven. It should also be noted that this Rule is not based upon any express provisions of the CARES Act but is solely an administrative interpretation and determination.
The first part of the Rule is positive, and provides that owner-employees with less than 5% ownership in a corporation (whether C corporation or S corporation) are not subject to the owner-employee compensation rules, which caps the amount of loan forgiveness. This applies to partners or members of entities (e.g., limited liability companies) that have elected to be tax corporations, but it does not apply to owners of entities that are tax partnerships.
The second part of the Rule, however, addresses several situations where non-payroll costs (mortgage interest, rent, utilities) are not eligible for full forgiveness, in order to avoid duplication of forgiveness. Any non-payroll costs attributable to the operations of a tenant or sub-lessee are not eligible for forgiveness. For example, if a borrower pays $10,000 rent per month but subleases a portion of the space to a third party for $2,500 per month, only $7,500 is eligible for forgiveness. Similarly, if a borrower has a mortgage on a building and leases a portion of the space to others, then the mortgage interest eligible for forgiveness is reduced by the percentage of the fair market value that is leased out. Thus, if 100% of a building is leased to others, none of the mortgage interest is eligible for forgiveness. And for shared space, rent and utilities must be pro-rated in the same manner as used for the 2019 tax returns. If borrowers have home office expenses, then only the share of covered expenses that were deductible on the 2019 tax filings are eligible for loan forgiveness.
One good part of the Rule is confirmation that rent payable to related parties is eligible for forgiveness, but this silver lining is tempered in that the eligible rent is limited to the extent that the rent does not exceed any mortgage interest that is attributable to the space being rented. Further, mortgage interest owed to a related party is not eligible for forgiveness.
Link to Interim Final Rule: https://home.treasury.gov/system/files/136/PPP--IFR--Treatment-Owners-Forgiveness-Certain-Nonpayroll-Costs.pdf