More Changes on Paycheck Protection Program Loan Forgiveness
This week the SBA released additional interim final regulations dealing with payroll costs for owner employees, related party payments for rent and mortgage interest and non-payroll costs shared with others. These changes are important as borrowers total expenses to submit with loan forgiveness applications. In some cases, changes may need to be made to expenses submitted with loan forgiveness applications to maximize loan forgiveness.
This new rule excludes from the definition of owner-employees of C corporations and S corporations with an ownership interest of less than 5 percent. Thus, an owner-employee of a C corporation or an S corporation needs to own 5 percent or more of the entity for payroll costs to be limited by the owner-employee rules. These rules limit payroll costs to 2.5/12 of the compensation paid in 2019, capped at $20,833. As a result of the change, a Corporation or S Corporation shareholder with a less than 5 percent ownership interest can include up to $46,154 of payroll costs, assuming the 24-week covered period is used for loan forgiveness. These shareholders are also not subject to the limitations of 2.5/12 of their 2019 W-2. This change does not apply to partners, including LLC members where the LLC is taxed as a partnership. It is possible that SBA will recognize this disparity and issue further guidance that provides similar treatment for partners.
The ability to use related party rent as an expense for loan forgiveness is limited to any mortgage interest expense on underlying mortgages for the property that were entered into before February 15, 2020. For these rules, any common ownership creates a related party. This inability to use some related party payments may require some borrowers to revise the expenses that are used for loan forgiveness.
In addition, mortgage interest paid under a note held by a related party is ineligible for forgiveness in all circumstances.
Finally, mortgage interest or rent paid for property that is sublet to others cannot be considered rent or interest that can be used for forgiveness, likely on the theory that such amounts are for passive rental income and not part of trade or business expenses. If a portion of space is sublet, then borrowers will need to reduce eligible rent or mortgage interest used for PPP loan forgiveness by that portion of the space which is sublet to an entity other than the PPP borrower. If a borrower shares space with another entity or has a home office, the portion of the rent and utilities reflected on the borrower’s 2019 income tax return (or expected to be reported on the 2020 income tax return for new businesses) is the amount that can be used for PPP loan forgiveness.
All of these rule modifications highlight how important it is to continually monitor rule changes as forgiveness applications are being prepared. Cherry Bekaert will be glad to assist with any questions you have regarding loan forgiveness applications.