The Small Business Administration (SBA) issued new PPP loan Interim Final Guidance (IFR) on August 24, 2020, on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs, in addition to new PPP loan forgiveness FAQs on August 4, 2020, and EIDL loan FAQs on August 11, 2020.
This interim final rule addresses the ownership percentage that triggers the applicability of owner compensation rules for forgiveness purposes. This interim final rule also addresses limitations on the eligibility of certain nonpayroll costs for forgiveness.
The SBA has redefined compensation limits for borrowers who are considered owner-employees who have up to a 5% stake in a C- or S-Corporation, and who have no meaningful ability to influence decisions over how loan proceeds are allocated. These stakeholders are not subject to the owner-employee compensation rule. This could potentially mean additional owner-employee wages are eligible for full loan forgiveness, especially for businesses using the eight-week covered period whose qualifying wages had been limited. The owner-employee wage cap is $15,384.62 (eight-week covered period) or $46,154 (24-week covered period). The cap for general partners is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, or 20.83%.
Related Party Rent
The eligibility of certain nonpayroll costs for loan forgiveness was clarified in this IFR.
Rent payments to a related party are eligible for loan forgiveness if:
- 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.
The SBA is effectively equating the PPP loan forgiveness portion of related party rent to the amount of mortgage interest owed on the building, and disallowing the portion of rent that covers the principle payment. If the building is mortgage-free, the entire related party rent expense is disallowed for PPP loan forgiveness. PPP borrowers must provide their lenders with mortgage interest documentation to substantiate these payments.
The portion of expenses attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, in the context of home-based businesses, household expenses, are not eligible for forgiveness to the landlord/PPP borrower but may be eligible expenses of the tenant.
FAQs – August 4, 2020
Clarification was provided with regard to the definition of travel as a qualifying utility expense.
Covered utility payments, which are eligible for forgiveness, include a “payment for a service for the distribution of “transportation” under the CARES Act. A service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. The payment of these fees by the borrower is eligible for loan forgiveness. States and cities can levee transportation utility fees on residents and businesses based on their use of the transportation system rather than taxes based on the value of the property they occupy.
Economic Injury Disaster Loan (EIDL) FAQs – August 11, 2020
- SBA will deduct the amount of the EIDL advance from the forgiveness amount remitted by SBA to the lender.
- If there has been a reduction in the forgiveness amount for an EIDL advance, any remaining balance due on the PPP loan must be repaid by the borrower.
- A borrower that received an EIDL advance in excess of the amount of its PPP loan will not receive any forgiveness on the PPP loan, because the amount of an EIDL advance is deducted from the PPP loan forgiveness amount.
Have a question about the impact of this SBA guidance on your business or organization, or need help with PPP loan forgiveness? Contact us – our COVID-19 Advisory Team is standing by to help you successfully navigate the way ahead. And, if your PPP loan of $2 million or less and are targeting the 8-week period for forgiveness, take our PPP Loan Forgiveness Quick Test and we’ll contact you with recommended next steps.
Barnes Dennig COVID-19 Advisory Team Leaders: