The Small Business Administration (SBA), in conjunction with the Treasury, issued a new Interim Final Rule (IFR) on Monday that provided more details around the loan forgiveness aspect of the Paycheck Protection Program (PPP).
The 10-page document addressed a few topics, but one that may be most impactful to privately-held businesses is the eligibility of related party rent payments.
According to the SBA's new guidance, a borrower may include related party rental payments as long as (1) the amount of loan forgiveness requested for rent or lease payments to a related party 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.
The IFR further explains that PPP loans are intended to help businesses cover certain non-payroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured.
In addition, the IFR establishes that owner-employees with less than a five percent stake in a C or S corporation are exempt from the PPP owner-employee compensation rules for determining the amount of their compensation for loan forgiveness.
The IFR also states that the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or subtenant of the PPP borrower. The IFR provided four examples:
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 percent of the FMV of the office building, then the borrower may only claim forgiveness on 75 percent 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 nonpayroll 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.
As always, we are here to help and are happy to assist you in maximizing your PPP loan forgiveness. If you have any questions about these or any other matters, please contact your Kreischer Miller relationship professional or any member of our team. We also continue to update our COVID-19 Resource Center, which you can access here.
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