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SBA Loosens Loan Forgiveness Rules for Owner-Employees

(Parker Tax Publishing September 2020)

The Small Business Administration (SBA) revised the loan forgiveness rules under the Paycheck Protection Program (PPP) to allow loan forgiveness for compensation to an owner-employee in a C- or S corporation who has less than a 5 percent ownership stake. In addition, the SBA advised that loan forgiveness for nonpayroll costs may not include any amount attributable to the business operation of a tenant or subtenant of the PPP borrower or, for home-based businesses, household expenses. SBA-2020-0044.

Background

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to provide immediate assistance to individuals, families, and organizations affected by the COVID - 19 emergency. Among the provisions contained in the CARES Act are provisions authorizing the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program titled the Paycheck Protection Program (PPP). Loans guaranteed under the PPP will be 100 percent guaranteed by SBA, and the full principal amount of the loans may qualify for loan forgiveness.

In June, the SBA, in SBA-2020-0038, limited the forgiveness of owner compensation to either eight weeks' worth (8/52) of 2019 net profits (up to $15,385) for an eight-week covered period or 2.5 months' worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period per owner in total across all businesses.

On August 24, the SBA issued interim final rule SBA-2020-0044, to provide additional guidance concerning the ownership percentage that triggers the applicability of the owner compensation rule for forgiveness purposes and limitations on the eligibility of certain nonpayroll costs for forgiveness.

Revised Guidelines for Owner Forgiveness of PPP Loans

In SBA-2020-0044, the SBA provides that 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. As noted above, the amount of loan forgiveness was capped for payroll compensation attributable to an owner-employee. There was no exception in the rule based on the owner-employee's percentage of ownership.

The SBA 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.

Change to Loan Forgiveness Rules for Certain Nonpayroll Costs

The revised SBA guidance also clarifies 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 or, for home-based businesses, household expenses.

Example: 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: 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 of the fair market value of the space that is not leased out to other businesses. If the leased space represents 25 percent of the fair market value of the office building, then the borrower may only claim forgiveness on 75 percent of the mortgage interest.

When determining the amount that is eligible for loan forgiveness, a borrower who shares a rented space with another business 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.

With respect to rent payments made to a related party, such payments are eligible for forgiveness 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. In this context, however, the related party itself is not also eligible to request loan forgiveness for this amount. 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 the 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. According to the SBA, 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.

For a discussion of the PPP, see Parker Tax ¶72,340.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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