SBA Issues New PPP Forgiveness Guidance Regarding Owner-Employee Compensation and Certain Nonpayroll Costs

After months of silence, in an August 24, 2020 Interim Final Rule, the SBA has issued additional PPP guidance relating to the percentage of a borrower’s ownership that triggers the treatment of an employee as an owner. The IFR also provides for limitations on certain rental and mortgage interest expenses a borrower might otherwise have considered to be eligible expenses for forgiveness. On the plus side, the guidance gives the go-ahead for the use of certain home-office expenses for this purpose, so long as they are allowed as a deduction on the taxpayer’s tax filings for the years in question.

Ownership Percentage for Employee to Be Subject to Owner PPP Limitations

The IFR identifies that owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule. However, the question and answer make no reference to partners in this context, as a result at this time a general partner with any interest in a partnership appears to continue to be treated as an owner under these rules.

Additional Clarification on Rental and Mortgage Interest Costs

The first question addresses expenses for rent when you rent out a portion of the office space.

The SBA and Treasury have declared that the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or subtenant of the PPP borrower. The basic premise is that if you are subleasing a portion of your space, your PPP expenses cannot include the leased-out portion as eligible expenses.

The second question addresses rent payments to a related party eligible for loan forgiveness.

There are now limitations on the amount of rent expense that can qualify for forgiveness when the payments are made to a related party. The SBA and Treasury have ruled that rent or lease payments to a related party are eligible for loan forgiveness provided that:

• The amount of loan forgiveness requested for those payments is capped at the amount of mortgage interest liability on the property during the covered period and only includes the portion that is attributable to the space being rented by the business, and
• The lease and the mortgage were entered into prior to Feb. 15, 2020.

In addition to this guidance, they SBA and Treasury have also noted that mortgage interest payments to a related party are not eligible for forgiveness.

The Porte Brown PPP Team is following the changes closely and will keep you updated as more information becomes available.