On Monday, the SBA and Treasury Department issued a new interim final rule (the “Rule”) addressing issues related to forgiveness of PPP loan proceeds used for owner-employee compensation and the eligibility for forgiveness of certain nonpayroll costs. The Rule includes two major changes to PPP, creating an exemption from the owner-employee compensation rules governing forgiveness of loan proceeds paid to certain owner-employees of entities taxed as C-corporations and S-corporations and, notably, limiting the extent to which PPP proceeds used to pay rent to a related company can be forgiven.
Pursuant to the Rule, owner-employees who have less than a 5% ownership stake in an entity taxed as a C-corporation or S-corporation are not subject to the owner-employee compensation rule previously published by SBA and Treasury. SBA and Treasury have stated the purpose of this Rule is to cover owner-employees who have no meaningful ability to influence decisions regarding the allocation of PPP proceeds.
Prior to issuance of the Rule, the regulations and guidance governing PPP provided that for borrowers which received a PPP loan prior to June 5, 2020 and used an 8 week covered period, the portion of owner-employees and self-employed individuals payroll compensation eligible for forgiveness was capped at 8 weeks’ worth of 2019 compensation or $15,385 per individual, whichever is less. For all other owner-employees and self-employed individuals (i.e., – those using a 24 -week covered period), payroll compensation was capped at the lesser of 2.5 months’ worth of 2019 compensation or $20,833. The maximum amount of forgiveness for which owner-employees of C-corporations were eligible was to be calculated based upon the amount of their 2019 cash compensation and employer contributions to employee retirement and health insurance, subject to the limitations set forth above. The maximum amount of forgiveness for owner-employees of S-corporations was to be calculated using the amount of their cash compensation and employer contributions to employee retirement, subject to the cap set forth above (employer cash contributions for health insurance are already included in employee cash compensation). For purposes of determining the eligibility of compensation paid to owner-employees for PPP forgiveness, the foregoing restrictions no longer apply to owner-employees with less than a 5% interest in the borrower, although other applicable regulations governing PPP continue to apply.
The new Rule does not amend any owner-employee compensation limits applicable to sole proprietors or partners. The portion of a PPP owner-employee income for which a sole proprietor who files schedule C or F may receive forgiveness remains capped by the amount of their owner compensation replacement based upon 2019 net profit. General partners remain capped by the owner compensation replacement based on the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties).
2. Eligibility of Certain Nonpayroll Costs for Loan Forgiveness
The Rule makes two clarifications regarding nonpayroll costs. First, the amount of loan forgiveness for which a borrower is eligible may not include any amount attributable to the business operation of a tenant or sub-tenant of the borrower or, for any home-based business, household expenses. Second, the Rule provides that rent payments to a related party are eligible for loan forgiveness as long as (i) the amount of loan forgiveness requested does not exceed the amount of mortgage interest that accrued on the mortgage loan during the applicable period of time which is allocable to the space being rented by the borrower, and (ii) both the lease for the property and the mortgage loan encumbering the property were entered into prior to February 15, 2020. This limitation may pose challenges for PPP borrowers which previously paid rent to a related entity in an amount in excess of the applicable mortgage interest that is allocable to the rented space.
Because of the continuous changes to the PPP program, some borrowers may benefit from delaying their application for forgiveness until more information is available. However, depending on applicable facts and considerations, certain borrowers may have important reasons to receive a decision on their application for loan forgiveness as soon as possible.
For more information regarding PPP, forgiveness of a PPP loan, or the impacts of PPP on business operations or planned business acquisitions, contact your Mika Meyers' attorney.