COVID-19 Resources

Additional PPP Guidance Issued for Certain Expenses

Written by David Crabtree, CPA on September 4, 2020

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The Small Business Administration (SBA), along with the Department of Treasury, issued a new Interim Final Rule (IFR) related to the Paycheck Protection Program (PPP) on August 24, 2020.

Below is a summary of the key considerations addressed in the IFR:

  • Ownership threshold established for which the owner-employee compensation rule applies
  • Eligibility of certain non-payroll lease and rent costs
  • Related party lease and rent cost eligibility

What Constitutes Ownership?

According to the IFR, owner-employees of C or S Corporations with less than 5 percent ownership are exempt from the owner-employee compensation rule. The amount of loan forgiveness for payroll compensation related to an owner-employee is capped by this rule. This is a favorable rule for borrowers that have owner-employees who qualify for this exemption.

As originally mentioned in our article, New Interim Final Rule Allows Borrowers to Apply for Forgiveness as soon as Loan Proceeds are Exhausted, here are the owner-employee rules.

According to the IFR, the owner-employee compensation rule established the following:

  • Caps eligible payroll costs of owner-employees and self-employed individuals at the lesser of eight weeks’ worth of 2019 compensation or $15,385 (for eight-week covered period loans) or the lesser of 2.5 months’ worth of 2019 compensation or $20,833 for all other borrowers.
  • “C-corporation owner-employees are capped by the amount of their 2019 employee cash described above plus employer retirement and health insurance contributions made on their behalf.”
  • “S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation [described above] and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf [are not eligible].”
  • “Schedule C or F filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.”
  • “General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses and depletion from oil and gas properties) multiplied by 0.9235.”
  • “For self-employed individuals, including Schedule C or F filers and general partners, retirement and health insurance contributions are included in their net self-employment income and, therefore, cannot be separately added to their payroll calculation.”

Eligibility of Certain Lease or Rent Costs

The IFR also established that non-payroll costs attributable to the business operation of a tenant or sub-tenant of a PPP borrower are not eligible for loan forgiveness. This also applies to household expenses of home-based business. Essentially, the IFR is establishing that a borrower cannot take credit for non-payroll costs of its tenants.

Below are a few examples included in the IFR:

  • “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 of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value 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 or Leases

Lastly, the IFR establishes eligibility of rent payments to a related party for loan forgiveness. The IFR defines a related party as “any ownership in common between the business and the property owner.”

Rent or lease payments to a related party are eligible for forgiveness if the follow two tests are met:

  • The rent or lease payment does not exceed the mortgage interest owed on the property during the Covered Period that is attributable to the space rented by the business;
  • The lease and mortgage were entered into prior to February 15, 2020

To support the eligibility of these payments, a borrower is required to provide its lender with mortgage interest documentation. Finally, the IFR establishes that mortgage interest payments to a related party are not eligible for forgiveness.

Where to Go from Here

Even though the SBA and the Treasury continue to issue guidance, there are still several questions that remain to be unanswered. We discussed some of the outstanding questions surrounding PPP and key considerations for those waiting to apply for loan forgiveness in this article.

In addition, Treasury Secretary Steven Mnuchin testified before the House of Representatives on September 1, 2020. Secretary Mnuchin told CNBC, “…for any loan over $2 million, the Small Business Administration will be doing a full review of that loan before there is loan forgiveness.”

We encourage those who are ready to begin the application process to remain patient while we wait for guidance on key considerations for loan forgiveness.

If you have any questions or need assistance, please connect with your Warren Averett advisor or have a member of our team reach out to you.

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