On August 24, 2020, the SBA released a new IFR (click here) pertaining to the PPP that addresses two primary items :
- Owner-employee compensation rules not applicable to certain owners
- Limitations on eligibility of certain non-payroll costs for loan forgiveness
Owner-employee compensation rules not applicable to certain owners
The June 26, 2020 IFR capped the amount of loan forgiveness to an owner-employee to either 8 weeks’ worth (8/52) of their 2019 wages capped at $15,385 for an 8 week period OR 2.5 months’ (2.5/12) of their 2019 wages for a 24-week period capped at $20,833 in total across all businesses. This latest IFR now clarifies that an owner-employee in an S Corporation or C Corporation who has less than a 5% ownership interest will NOT be subject to these owner-employee compensation rule. It is important to note that the IFR applies the exception ONLY to corporations and does not provide the exception for partnerships or LLCs/LLPs taxed as partnerships. It should be noted that the SBA did not clarify if the 5% ownership interest is determined by voting rights or value and did not address related party attribution.
Limitations on eligibility of certain non-payroll cost for loan forgiveness
The new IFR clarifies shared rent, mortgage interest and utility costs. More specifically the IFR provides four examples that clarify these items :
- Rent paid to the borrower from a subtenant reduces the eligible rent expense
- Mortgage interest that covers property subject to a lease with a third party must be reduced pro-rata by the percentage of the property which is leased out (by fair market value)
- For shared spaces, payment of utilities must be similarly allocated (as in #2)
- When determining the amount of non-payroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings (or if a new business, the borrower’s expected 2020 filings)
Lastly, the new IFR places a new cap on loan forgiveness available for rent paid to related parties. The maximum forgiveness available on related party rent is limited to the amount of mortgage interest owed on the property during the covered period in question that is attributable to the space being rented by the borrower’s business. It should also be noted that both the lease and the mortgage must be in place prior to February 15, 2020. The new IFR also reiterates that any mortgage interest owed to a related party is not eligible for forgiveness.
It should be noted that the IFR refers to the term “related party” as including “any ownership in common between the business and the property owner.” They do not specify a specific percentage threshold. The IFR also mentions, if the borrower is applying for related party rent forgiveness, they must provide the lender with mortgage documentation to support the related payments.
We will continue to keep you updated to the latest PPP changes. Please do not hesitate to contact us should you have any questions regarding your PPP loan forgiveness submission.