Paycheck Protection Program – Treatment of Owners and Forgiveness of Certain Nonpayroll Costs

Schneider Downs continues to track the evolving landscape of federal financial programs offered in the wake of the business disruption caused by the coronavirus crisis.  On August 24, 2020, the U.S. Small Business Administration (SBA) released a new Interim Final Rule (IFR) that addresses the ownership percentage that triggers the applicability of owner compensation rules for forgiveness purposes and clarifies limitations on the eligibility of certain nonpayroll costs for forgiveness purposes. 

Question:  Are any individuals with an ownership stake in a PPP borrower exempt from application of the PPP owner-employee compensation rule when determining the amount of their compensation that is eligible for loan forgiveness?

Answer:  Yes.  The IFR provided a threshold that owner-employees with a less than 5% ownership in S-Corporation and C-Corporation entities are exempt from the owner-employee compensation limits for forgiveness.  This is a favorable change from the previous no-exception rule that was established under the June 26, 2020 IFR issued by the SBA. 

Question:  Are amounts 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, eligible for forgiveness?

Answer:  No.  Borrowers are not eligible for forgiveness on nonpayroll costs that are reimbursed/paid by tenants or sub-tenants.  The IFR provides several examples to illustrate the rule, which relate to rents, mortgage interest and shared space.  In general, borrowers should include on their loan forgiveness application net amounts paid for their usage/consumption. 

Question:  Are rent payments to a related party eligible for loan forgiveness?

Answer:  Yes, however, there are limits to the costs that are eligible for forgiveness.  Rental payments to a related party are limited to the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business.  There is no exemption on the ownership stake to this rule. Any ownership in common between the business and the property owner is deemed to be a related party, and the agreement will be subject to the limitation.  This is in addition to the prior requirement that the mortgage or lease be in place as of February 15, 2020.

The SBA issued this rule in order to provide equitable treatment to businesses that hold property within the business as those that hold property in a separate entity.  

If you need more information or assistance regarding your PPP loan, visit our website at www.schneiderdowns.com/ppp, reach out to any of your contacts at Schneider Downs or contact Joel Rosenthal (jrosenthal@schneiderdowns.com).

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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