New SBA Forgiveness IFR Addresses Owner-Employee Comp and Rent-Related Costs

09/10/2020

By Jack Rybicki Managing Principal of Industry, CliftonLarsonAllen Email T. 813.384.2701

Key insights

  • The SBA released an interim final rule (IFR) entitled Treatment of Owners and Forgiveness of Certain Nonpayroll Costs on August 24, 2020.
  • The IFR provides clarity on topics including owner compensation reporting; borrowers with tenant, sub-tenant, or home-based businesses; and related party rents.
  • CLA can help you navigate the PPP loan forgiveness process.

On August 24, 2020, the Small Business Administration (SBA) released an Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs. The interim final rule (IFR) clarifies the applicability of previously issued IFRs regarding the reporting of compensation for certain classes of owner-employees. It also provides new guidance on how to consider certain nonpayroll costs, including related party rents and costs associated with as the business operations of tenants, sub-tenants, and co-tenants or with home-based businesses.

What we know

Owner-employees

Previous guidance related to the reporting of payroll costs for owner-employees, which capped the amount of loan forgiveness for payroll compensation attributable to an owner-employee, provided no exception based on the owner-employee’s percentage of ownership.

The new IFR provides that the owner-employee rules are not applicable to owner-employees with less than a 5% ownership stake in a C- or S-corporation. Owner-employees with less than a 5% ownership stake should be included in either table 1 or table 2 of schedule A and use amounts paid during the covered period or alternative payroll covered period, rather than use 2019 earnings as set forth in the previous guidance.

Related party rent

Since the inception of the Paycheck Protection Program (PPP), the question of “how will related party rents be considered” has been a hot topic of conversation, given the pervasive nature of these types of arrangements in small businesses. The guidance provided, while not favorable to the borrower, settles the topic.

According to the new IFR, related party rent is eligible for forgiveness, but only to the extent that it represents the mortgage interest owed on the underlying property attributable to the space being rented by the borrower. Therefore, if monthly rent is $5,000 and monthly mortgage interest on the building is $3,000, only $3,000 of the rent would be eligible for forgiveness. The guidance also reiterates the requirement for both the lease and the underlying mortgage to be in place as of February 15, 2020.

Nonpayroll costs attributable to the operations of a tenant, co-tenant, or sub-tenant

Amounts related to the business operations of a tenant, co-tenant, or sub-tenant of the borrower are not eligible for forgiveness. Consider these examples from the IFR:

  • Sub-leases — For a PPP borrower that rents an office building for $10,000 per month and sub-leases a portion of the space to another business for $2,500, only $7,500 per month is eligible for loan forgiveness.
  • Tenants — If the borrower owns a building subject to a mortgage and leases a portion of the building to one or more other business, the portion of the mortgage interest that is eligible for loan forgiveness is limited to the percentage share of the space that is not leased out to the other business(es).
  • Co-Tenants — If the borrower shares a rented space with another business, only borrower’s share of the rent and utilities – prorated in the same manner as on the borrower’s 2019 tax filings – is eligible for loan forgiveness.

Nonpayroll costs for home-based businesses

For home-based businesses, costs eligible for loan forgiveness are limited to the portion of covered expenses that were deductible on the borrower’s 2019 tax filings or, for a new home-based business, to the portion that is expected to be deductible on the borrower’s 2020 tax filings.