PPP Interim Final Rule: Owner-Employee Compensation and Eligible Nonpayroll Costs
On Monday, August 24, 2020, the Small Business Administration (SBA) and U.S. Treasury released an interim final rule that gave further guidance on the Payroll Protection Program (PPP) loan forgiveness for owner-employee compensation and eligible nonpayroll costs.
The interim final rule states that owner-employees of C or S corporations with less than a 5% stake are exempt from the PPP owner-employee compensation rule that determines how much of their compensation they are allowed to apply towards loan forgiveness. The goal of the interim final rule is to cover compensation for owner-employees who don’t have enough stake in the company to influence decisions on how PPP funds are distributed.
Further guidance was also provided for eligible nonpayroll costs for business owners who holds the property of a separate entity and for those who hold the property the business operates on. The SBA and Treasury have stated that the borrower’s requested forgiveness amount towards nonpayroll costs cannot include a tenant or subtenant’s business operation. For example: if the borrower has a mortgage on an office building that is being used for the borrower’s business, and the borrower leases 25% of the office space in the building to other tenants, the borrower can only claim 75% of the mortgage interest on the forgiveness application.
If the borrower holds the property of the business, rent or lease payments to the related party can be eligible for forgiveness if (1) the forgiveness amount requested is not more than the business’ mortgage interest owed during the covered period, and (2) the business’ lease was in place prior to February 15, 2020. If one of these two exceptions are not met, the payments will not be eligible for forgiveness. The SBA and Treasury have reiterated that the purpose of the PPP loans is to help businesses cover their costs, not to make payments to a business owner if the business is structured a certain way.
As more and more covered periods are coming to a close, we expect that additional guidance will be released. Contact us for help with your forgiveness application or questions you may have about eligible expenses.