SBA Issues Interim Final Rule Regarding Treatment of Owners and Forgiveness of Certain Nonpayroll Costs Under the PPP
The Small Business Administration (SBA) has published a new interim final rule regarding the Paycheck Protection Program (PPP) to address: (1) the ownership percentage that triggers the applicability of owner compensation rules for forgiveness purposes; and (2) limitations on the eligibility of certain nonpayroll costs for forgiveness.
First, the SBA notes that its PPP regulations cap the amount of loan forgiveness for payroll compensation attributable to an owner-employee. The SBA published a separate interim final rule on June 26, 2020 clarifying the caps on the amount of loan forgiveness available for owner-employees and self-employed individuals’ own payroll compensation, (e.g., eight weeks’ worth of 2019 net profit – up to $15,385 – for an eight-week covered period or 2.5 months’ worth of 2019 net profit – up to $20,833 – for a 24-week covered period). The SBA notes there is no exception to these caps based on the owner-employee’s percentage of ownership. Per this interim final rule, however, the SBA has determined that an owner-employee in a C- or S-Corporation who has less than a five percent ownership stake will not be subject to the owner-employee compensation cap. The agency states that this exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
Second, the interim final rule clarifies that the amount of PPP loan forgiveness requested 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. As an example, the SBA provides that if 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. The interim final rule also provides that rent payments to a related party are eligible for loan forgiveness as long as: (1) 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 (2) the lease and the mortgage were entered into prior to February 15, 2020. The borrower must provide its lender with mortgage interest documentation to substantiate these payments. The SBA adds that while rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.
This interim final rule is effective today, August 27, 2020. Comments are due by September 28, 2020 and can be submitted via the federal eRulemaking portal using Docket ID SBA-2020-0044.
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