Article written by:
Rebekah Smith, CPA, CFF, CVA, MAFF
Director of Forensic & Dispute Advisory Services
Dustin Minton, CPA, MBA
Director, Restaurant Services
Director, Accounting & Business Advisory Services
Late last week, a new Interim Final Rule (IFR) was published by the Small Business Administration (SBA) that provided additional guidance regarding Paycheck Protection Program (PPP) loans for borrowers, including:
- Applicability of owner compensation thresholds to minority investors;
- Eligibility of tenant or sub-tenant non-payroll costs for loan forgiveness; and
- Eligibility of related party rents for loan forgiveness.
With most banks not accepting loan forgiveness applications yet, there is still time to adjust your forgiveness application prior to submission. Let’s jump into each of the updates.
If you recall from previous guidance, owner-employee compensation was capped at either $15,385 (for an eight-week covered period) or $20,833 (for up to 24 weeks) across all businesses for which the owner-employee had an ownership stake; however, there was no clarity around any thresholds for minority owners. The new guidance clarifies that an employee/owner in a C or S Corporation with less than a 5 percent ownership stake will not be subject to the owner-employee compensation rules. Please note that entities taxed as Schedule C, Schedule F, or Partnerships are not mentioned in this clarification and thus this new guidance would appear to not be applicable.
The guidance clarifies that non-payroll costs incurred by a tenant or sub-tenant are not eligible for loan forgiveness if the borrower is also the lessor or sub-lessor. The most common example would be when the borrower has rented space and subleases a portion of that space to a sub-tenant. In this example, if the borrower has rented the space for $10,000 and subleased a portion of the space for $2,500, the borrower’s eligible rent cost is $7,500. See this IFR for further examples on page 6. Those costs may be eligible for forgiveness by the sub-tenant related to its own PPP loan.
Related Party Rent Payments
Related party rent payments continue to be eligible non-payroll costs so long as the lease arrangement was in place prior to February 15, 2020; however, the amount eligible for forgiveness is now capped. The capped eligible amount for forgiveness is equal to the mortgage interest owed by the related party lessor during the PPP loan covered period. If the related party lessor does not have a mortgage outstanding on the property, there would be no eligible rent costs for the borrower. Related party is defined as any ownership in common between the borrower and the property owner. The borrower must provide its lender with the related party’s mortgage interest documentation to support these eligible costs. Another distinction was made that although lease or rent payments to a related party are eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.
As we wait for Congress to finalize the next round of legislation regarding the pandemic impact, we expect to see further clarifications being made for PPP and related forgiveness rules. Most lenders are still waiting to open their loan forgiveness application process until this next round of legislation is enacted into law. To learn more about the proposed changes, listen to our recent webinar.