New PPP Forgiveness Guidance Addresses Owner-Employee Compensation, Rent-Related Costs
AAFCPAs would like to make clients aware that the U.S. Treasury and Small Business Administration (SBA) released an interim final rule Monday, August 24th, addressing Paycheck Protection Program (PPP) forgiveness issues related to owner-employee compensation and the eligibility of non-payroll costs. Specifically, the new guidelines state that an owner-employee in a C or S corporation who has less than a 5% ownership stake will not be subject to the owner-employee compensation rule, which caps the amount of loan forgiveness on owner-employee compensation. The exemption’s intent is to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated, according to the interim final rule.
It is still unclear whether this exception also applies to non-cash compensation paid to such owner-employees. Pursuant to a previous interim rule, payments for non-cash compensation are not forgivable if included in the owner-employee’s wages (as a matter of general tax principles). For example, health insurance premiums paid on behalf of an S corporation employee would be included in their wages if their ownership stake in the business was greater than 2% and, thus, these premiums would not be eligible for forgiveness. AAFCPAs expects further guidance from the SBA on this topic.
The current PPP Forgiveness Application asks all borrowers to certify as follows:
- if a 24-week covered period applies, the forgiveness amount requested does not exceed 2.5 months’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $20,833 per individual; and
- if the borrower has elected an 8-week covered period, the forgiveness amount requested does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
This change means that the $20,833 cap for a 24-week period does not apply to C Corp and S Corp shareholders that own 5% or less of the company. For a 5% shareholder, the cap on wages for 24 weeks is now $46,153, which is the same as all other employees.
Rent, Lease and Mortgage Interest Payments to Related Parties
The SBA and Treasury have stated that rent or lease payments to a related party are eligible for loan forgiveness provided that:
- the amount of loan forgiveness requested for those payments 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
- the lease and the mortgage were entered into prior to Feb. 15, 2020.
This is a change to the related party rules. Before this Interim Final Rule, there was no limitation on the rent paid to a related party that could qualify for forgiveness so long as the rent was a fair market value. This change applies a “look-through” rule to space leased from a related party, and therefore caps the eligible expenses to only allow for the mortgage interest owed on the property during the covered period to be forgiven. The new rule limits the amount of rent or lease payments made to a related party that are eligible for loan forgiveness to “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.” This would mean that if the related party owns the building outright, meaning not subject to a mortgage, then no rent can be forgiven regardless of if the rent was set at fair market value. For these purposes, the rule considers any common ownership between the business and the property owner as constituting a related party, with no de minimis exception.
Mortgage interest payments to a related party are NOT eligible for forgiveness
Per the ruling, PPP loans are intended to help businesses cover non-payroll costs owed to third parties, not payments to a business’s owner that occur because of how the business is structured. This appears to be the case whether the common ownership is 1% or 100%, although it remains unclear if this is the intended result.
Expenses funded by forgiven loan proceeds remain nondeductible (for now)
As a reminder, while Congress continues to consider the issue, expenses related to any loan forgiveness remain nondeductible for federal tax purposes. It is unclear whether this will be addressed when lawmakers return from their August recess.
We encourage you to reach out to your AAFCPAs tax advisor to discuss how the above may affect your tax situation. Proper tax planning can help your organization understand the impact to you.
AAFCPAs continues to monitor developments to the PPP loan stimulus initiative and will keep you informed as changes occur or provisions become clarified. If you have any questions, please contact your AAFCPAs Partner.