Important clarification on owner-employee compensation rules and nonpayroll costs
Early this week, the SBA and Treasury issued a PPP interim final rule (IFR) related to owner-employee compensation rules and eligibility of nonpayroll costs. This IFR is likely to impact many businesses eager to apply for forgiveness.
- The IFR finally defined owner-employee as someone owning at least 5 percent of a C- or S- Corporation. Owner-employees with less than 5 percent of C- or S- Corporations are not subject owner-employee compensation rules. Previous IFRs limited compensation to owner-employees to $20,833 but never defined who qualified as an owner-employee.
- The IFR limits certain nonpayroll costs to those attributable to business operations and excludes amounts attributable to the business operation of a tenant or a sub-tenant. For example, 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 forgiveness. Borrowers working out of their home may include only the share of covered expenses that were deductible on their 2019 tax filings, or if a new business, their expected 2020 tax filings.
- The IFR also provides guidance designed to maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.
- The IFR states rent payments to a related party are eligible for loan forgiveness as long as (1) the amount of 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 IFR continues to state any ownership in common between the business and property owner is a related party for these purposes. 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.
The complete IFR can be found at https://www.sba.gov/document/policy-guidance-ppp-interim-final-rule-treatment-owners-forgiveness-certain-nonpayroll-costs
Since the covered period has been extended to 24 weeks, many businesses will be able to achieve maximum forgiveness with payroll costs alone. In most cases, this will eliminate any negative consequences of this most recent IFR. Borrowers should discuss how this IFR impacts their forgiveness application with their accountant or advisor.