Additional Guidance for Owner-Employees and Non-Payroll costs
The U.S. Small Business Administration (SBA) and Treasury issued an interim final rule addressing Paycheck Protection Program forgiveness issues related to owner-employee compensation and the eligibility of nonpayroll costs.
Owner – Employees
As provided in previous rules, compensation for owners of an S Corporation or C Corporation cannot exceed the lesser of $20,833, or 20.833% of their 2019 compensation, or the lesser of $15,385 or 15.385% of 2019 compensation if the borrower elects to use an 8- week Covered Period. The interim final rule establishes that owner-employees with less than a 5% stake in a C or S corporation are exempted from the PPP owner-employee compensation rule for determining the amount of their compensation for loan forgiveness.
The new IFR makes it clear that individual shareholders owning less than 5% of the compensation paid to shareholders owning less than 5% can be treated just like any other compensation and qualify for forgiveness for up to $46,154 of compensation if a 24-week period is elected. The exemption’s intent is to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
Expenses related to sub-lease or home office
Although borrowers might expect to capture all rent, mortgage interest or utility expenses when calculating its forgiveness amount, they must be careful to take into the account the portion of such expenses that are attributable to a tenant or subtenant or to household expense for a home-based business. The IFR provides four examples that explain this new rule:
Example 1: A borrower rents an office building for $10,000 per month and subleases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
Example 2: A borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value (FMV) of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the FMV of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.
Example 3: A borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
Example 4: A borrower works out of his or her home. When determining the amount of nonpayroll 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 tax filings.
Related Party Rent Payments
The IFRs provide that mortgage interest payments to a related party are not eligible for loan forgiveness.
As a result of the above, borrowers who own their building in a separate entity free and clear with no mortgage will not receive credit towards forgiveness for rent paid to the related entity. The CARES Act does not provide definition of “related party” and the IFR describes “any ownership in common between the business and property owner is a related party”. The limitation applies even if an individual owns just 1% of the entity receiving rent payments.
We will provide updates as the SBA continues to change the rules and issue more guidance on loan forgiveness.
If you have questions about this or other topics, please know we are available to speak by phone at 215-675-8364 or you may reach us via email at firstname.lastname@example.org.
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