The Small Business Administration issued an interim final rule (IFR) on August 24, 2020 to address applicability of owner compensation rules for minority interest owners and the eligibility of non payroll costs.

Certain owners exempt from PPP owner-employee compensation rule

The IFR provides guidance to borrowers relative to the applicability of owner-employee compensation rules.  Specifically, it exempts owners with less than a 5% ownership stake from applying the owner-employee compensation rule.  The exemption is intended to cover owner-employees who have no “meaningful” ability to influence decisions over how loan proceeds are allocated.  The exemption from the rule only applies to owner-employees of S or C corporations, not partnerships or limited liability companies.

In an earlier post, we provided a chart detailing the maximum amount of forgiveness a borrower may receive related to owner-employee compensation.  The amount varies by entity type and may also be limited based on prior year income.  CLICK HERE to determine the limits on forgiveness for PPP proceeds used to pay owner-employees.

Eligibility of Certain Nonpayroll Costs for Loan Forgiveness

Shared expenses attributable to the business operation of a tenant or sub-tenant of the PPP borrower or to household expenses in a home-based business are not eligible for forgiveness:

  1. Rent expense should be reduced by the amount of any sub-lease.  The IFR provides the following example:
    1. PPP borrower rents an office building for $10,000 per month and sub-leases out a portion for $2,500 per month; only $7,500 per month is eligible for forgiveness.
  2. Mortgage interest for a mortgage that covers property subject to a lease to a third party must be reduced pro rata by the percentage (by fair market value) of the property which is leased out.
  3. If a PPP borrower is in a shared space environment, the borrower must prorate rent and utility payments in the same manner as the 2019 tax filings (or expected 2020 tax filings for new businesses).
  4. Home based businesses / office expenses are only eligible for forgiveness to the extent they were deductible on the borrower’s 2019 tax returns (or expected 2020 returns for a new business).

Related Party Rent & Mortgage Interest

The eligibility of related party rent and mortgage interest for forgiveness has been an area of uncertainty for PPP borrowers.  The question has come up repeatedly on every PPP webinar hosted by Brinker Simpson and until this IFR, there has been no guidance from the SBA or Treasury restricting related party rent or mortgage interest as covered expenses eligible for forgiveness.

The IFR provides that mortgage interest paid to a related party is not eligible for forgiveness, but related party rent expenses are eligible with limitations and when certain conditions are met. 

  • Related party rent expenses are eligible for forgiveness to the extent the amount requested does not exceed the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented;
  • the origination of the lease and mortgage had to occur prior to February 15, 2020.

The IFR further provides that any ownership in common between the business and the property owner should be considered a related party for the purposes of these limitations.  

We are in this together,

Brinker Simpson & Company, LLC

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice & cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).