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New PPP forgiveness guidance addresses owner-employee compensation, rent-related costs

Aug

26

New PPP forgiveness guidance addresses owner-employee compensation, rent-related costs

On August 11, 2020, the SBA released additional FAQs for both the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) program.  Both updates may be found at the following links:

FAQs for Lenders and Borrowers (Questions 50 & 51) – https://www.sba.gov/sites/default/files/2020-08/Final%20PPP%20FAQs%20%28August%2011%2C%202020%29-508.pdf

FAQs about PPP Loan Forgiveness – https://www.sba.gov/sites/default/files/2020-08/PPP%20–%20Loan%20Forgiveness%20FAQs%20%28August%2011%2C%202020%29-508.pdf

Below is a summary of updates from both documents:

  • The term “group health care benefits” has been expanded to encompass health insurance premiums, vision, and dental benefits.
  • Lenders (e.g. banks) will be able to confirm the amount of EIDL advances to deduct from the overall PPP forgiveness amount.
  • If a borrower received an EIDL advance in excess of their PPP loan, the borrower will not receive any forgiveness on their PPP loan.
  • Lenders (e.g. banks) will notify borrowers of the loan forgiveness amount remitted by the SBA and the date on which the borrower’s first loan payment is due, if applicable.
  • Lenders (e.g. banks) will continue to service the loan/receive loan payment after forgiveness is determined, which the lender will remit to the SBA.

In addition, on August 24, 2020, the SBA updated its interim final rule addressing PPP forgiveness.  Below is a summary of those updates:

  • Owner-employees with less than a 5% stake in a C Corporation or S-Corporation are exempt from the PPP owner-employee compensation rule(s).
  • Forgivable non-payroll costs may not include amounts attributable to the business operation of a tenant or subtenant of the PPP borrower.

Example 1: 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 loan forgiveness.

Example 2: A borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value (FMV) of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the FMV of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.

Example 3: A borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.

Example 4: A borrower works out of his or her home. When determining the amount of non-payroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.

  • Rent or lease payments to a related party are eligible for loan forgiveness, provided:
    1. The amount of forgiveness requested on 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
    2. The lease and the mortgage were entered into prior to February 15, 2020
  • Mortgage interest payments to a related party are not eligible for forgiveness.

Please reach out to us with any questions.