The Small Business Administration (SBA) published its 24th Interim Final Rule on the Paycheck Protection Program (PPP) on August 24, 2020. The guidance addresses loan forgiveness issues for owner-employees and certain nonpayroll costs.
The amount of owner’s compensation which may be included in your loan forgiveness computation is limited to the lesser of $20,833 or the 2.5-month equivalent of his or her compensation in 2019 (if using a 24-week covered period) or the lesser of $15,385 or the 8-week equivalent of his or her compensation from 2019 (if using an 8-week covered period).
In the latest Interim Final Rule, the SBA provides an exception from the owner-employee compensation rule for owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation. The guidance notes that the exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how the loan proceeds are allocated. With that being said, the current guidance does not discuss whether any related party affiliation rules will be applied when determining an individual’s ownership percentage.
Certain Non-Payroll Costs
Rent Payments to a Related Party
Rents paid to a related party are eligible for loan forgiveness if those payments meet two criteria:
- The amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and
- The lease and the mortgage were entered into prior to February 15, 2020.
Before this Interim Final Guidance, there was no limit on the amount of rent payments which could be included in the loan forgiveness. The only stipulation was that the lease had to be entered into prior to February 15, 2020.
The Interim Final Guidance also excludes mortgage interest payments made to a related party from eligible PPP expenditures.
Other Limitations on Nonpayroll Costs
Loan forgiveness for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses. Essentially, you are only allowed to include expenses for which you are ultimately responsible for paying (i.e. you may not include expenditures for which you’ll receive reimbursement such as in the case of a sub-tenant situation). Also, if you operate your business out of your home, you may not include personal expenses in the PPP forgiveness application. To determine the business portion of the expenses, refer to your 2019 tax filings.
If your business needs assistance navigating the complex and ever-changing PPP rules, please reach out to your MarksNelson advisor.