New SBA Guidance

SBA ISSUES GUIDANCE ON PPP LOAN FORGIVENESS CALCULATIONS

On August 24, 2020, the Small Business Administration (SBA) issued additional and long awaited guidance clarifying a few of the many open issues that relate to the Paycheck Protection Program (PPP) loan forgiveness calculations.  The topics addressed in the new Interim Final Rule (IFR) include guidance on the percentage of ownership in a corporation that requires an employee’s compensation to be subject to owner rules for payroll costs in the loan forgiveness calculations.   Also addressed are clarifications for related party rent expense, mortgage interest and home office expenses.

Based on our initial review, two particular items that may impact many borrowers are:

  • Owners of corporations with at least 5% ownership are considered owner/employees for the PPP loan forgiveness limitations.
  • Payments of rent expense to related parties are eligible for forgiveness only to the extent of the mortgage interest incurred by the property owner during the covered period.

Details of the most recent Interim Final Rule are noted below:

The new IFR notes a 5% ownership threshold for an owner of a corporation to be subject to the payroll cost limitation rules, as detailed here:

  1. Owners

Q:  Are any individuals with an ownership stake in a PPP borrower exempt from application of the PPP owner-employee compensation rule when determining the amount of their compensation that is eligible for loan forgiveness?

A:  Yes, owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule. The First Loan Forgiveness Rule, as revised by the Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, 85 FR 38304, 38307 (June 26, 2020), caps the amount of loan forgiveness for payroll compensation attributable to an owner-employee. There is no exception in the rule based on the owner-employee’s percentage of ownership. The Administrator, in consultation with the Secretary, has now determined that an owner-employee in a C- or S-Corporation who has less than a 5 percent ownership stake will not be subject to the owner-employee compensation rule. This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.


Additional Guidance on Rent Expense and Mortgage Interest Costs:

The new IFR provides guidance for certain rent and mortgage interest payments as well as clarification on home office expenses that will qualify as non-payroll cost forgiveness, as detailed below:

2a. Eligibility of Certain Non-payroll Costs for Loan Forgiveness:

Q:  Are amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, in the context of home-based businesses, household expenses, eligible for forgiveness?

A:  No, the amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operations of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses.

The IFR includes the following four examples:

  • Example 1: A borrower rents an office building for $10,000 per month and sub-leases 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 of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value 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.

The new IFR also provides guidance for related party rent payments, capping eligible expenses based on only the mortgage interest owed on the property during the covered period.  For this section, any common ownership between lessor and the lessee is enough to trigger this limitation.

2b.   Details on Guidance for related Party Rent Payments:

Q:  Are rent payments to a related party eligible for loan forgiveness?

A:  Yes, 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.

Any ownership in common between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments. While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness. 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. This will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.


Sax will continue to update you as further details are made available.  Reach out to your Sax advisor or email [email protected] with questions.  For more and on-going information relative to your state and business, visit Sax’s COVID-19 Resource Center.



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