SBA issues surprising new PPP guidance addressing rent-related costs and owner-employee compensation 

On August 24, the Small Business Administration (SBA) issued a new Interim Final Rule (IFR) addressing the Payroll Protection Program (PPP) as it relates to the ownership percentages that trigger the applicability of the owner compensation rules and limitations on the eligibility of certain nonpayroll costs for purposes of loan forgiveness.

Surprising many PPP borrowers was the new guidance surrounding rental payments. Rental payments to a related party are eligible for forgiveness if:

  • The amount of rent does not exceed the amount or mortgage interest owed on the property during the covered period that is attributable to the space being rented; and,
  • The lease and mortgage were both in effect prior to February 15, 2020.

The IFR also states that a borrower must provide to its lender the related party’s mortgage interest documentation as part of the borrower’s loan forgiveness application.

Unexpectedly, the IFR also states that mortgage interest payments to a related party are not eligible for forgiveness – even though it provides the authority to support the distinction between related-party rental payments and related-party interest payments.

Additionally, the IFR exempts from the limitation owner-employees that own less than 5% of a C or S corporation. It also limits the amount of non-payroll expense that can be forgiven; for instance, forgivable rent cannot include amounts attributable to a sub-tenant. In the same vein, interest expense on a covered mortgage can be forgiven only to the extent it relates to the borrower’s use of the underlying property.

For borrowers who work out of their home, nonpayroll costs eligible for forgiveness include only those costs that were deductible on their 2019 tax returns – or for new businesses, deductible on their 2020 tax returns. Additionally, borrowers engaged in home-based businesses cannot include household expenses on their loan forgiveness applications.

To get assistance filing PPP loan forgiveness documents, please contact your ShindelRock tax professional.