While the early days of April and the mad rush for Paycheck Protection Program (PPP) funds seem like ancient history at this point, many businesses are still carrying these loans on their balance sheet in anticipation that they will be soon forgiven and long forgotten. In the meantime, the Small Business Administration (SBA) released more guidance on August 11, and just recently on August 24. The most recent interim final rule can be found here and addresses several long awaited questions regarding owner-employees and treatment of related party rents.
First, the interim final rule defines owner-employees, as it relates to limits on their compensation to be used as eligible loan forgiveness cost, to those owning 5% or greater of an S Corporation or C Corporation. As a reminder, previous guidance issued on June 26, 2020, limits the amount of owner-compensation to be used as payroll cost eligible for loan forgiveness during the covered period to the lesser of their 2019 compensation pro-rated or actual 2020 cost. Additionally, company paid health insurance and retirement benefits paid on behalf of those owner-employees are disallowed. In no circumstance would an owner-employee’s payroll cost exceed $100,000 pro rated over the covered period. This is a relief to many S-Corporation and C-Corporation owners who own less than 5% of the stock of those entities, who based on this guidance should be treated same as all other employees of the borrowing corporation businesses. For self-employed individuals reporting business income and expenses on a Schedule C or those individuals who are members of an LLC taxed as a partnership or partners in a partnership, different rules apply and have not changed in this latest guidance.
The SBA guidance also addresses two important, and likely most significant non payroll costs for most business, rent and mortgage interest. Borrowers must spend at least 60% of their loan proceeds on payroll; however, the remaining 40% can be used on rent, utilities, mortgage interest, and gas used for business vehicles. There are several examples the SBA points to when a borrower business is a tenant but also has a sub-tenant and, in these cases, common sense prevails where the amount of rent used for loan forgiveness should be netted against any rental income received from sub-tenants. In the case of a borrower business who owns the building and occupies a portion of the space while leasing the remaining portion and pays mortgage interest on the entire building, the amount of mortgage interest that can be used in loan forgiveness should be limited to only the fair market value of the building the borrower business occupies. As an illustration, if the leased space represents 25% of the fair market value of the office building, the borrower may only claim forgiveness on 75% of the mortgage interest. Additionally, borrower businesses working from their homes are able to use a portion of the expenses used on their 2019 tax returns as eligible loan forgiveness costs.
Perhaps one of the most frequently asked questions we have received, is if rent payments paid to a related party are eligible for loan forgiveness. This interim final rule finally answers that question. The answer is yes, they are; however, there is a catch in that the amount of rent paid to the related party which can be used for loan forgiveness is limited to the amount of mortgage interest the related party owes during the covered period. This would suggest that if there is no mortgage on the property, then no benefit is derived for loan forgiveness. The rule clarifies that both the mortgage and lease agreement must be in place before February 15, 2020 and that a related party relationship for purposes of this rule exists if there is any common ownership between the borrower entity and the landlord entity. Additionally, if the borrowing business is paying mortgage interest to a related party, those payments are disallowed by this rule.
Many businesses who applied for and received PPP funds in April may be ready to apply for loan forgiveness; however, many lenders participating in this program are still busy building out their loan forgiveness processes and platforms. We also are urging patience, as there are pending issues that could change the dynamics, such as whether or not expenses paid for with the PPP funds can be deducted for tax purposes. The SBA continues to issue guidance that could impact the loan forgiveness application inputs, such as this interim final rule discussed in the article. Although Congress is addressing the tax issue, it is part of a larger piece of legislation that has many other implications. The SBA allows for ten months after the covered period ends, which is either eight weeks or 24 weeks from the loan disbursement date, to apply for forgiveness and, while most businesses would like to move beyond PPP, there is no need to rush and diligence should be exercised in this process to ensure maximum benefit.
How Can VonLehman Help?
VonLehman has established a process where we will assist businesses in filling out their loan forgiveness application and gathering the necessary information to submit to their lenders. We will be utilizing an online platform to facilitate this process, which will produce a completed loan forgiveness application.
If you are interested in this service please contact us at the form below.
VonLehman experts have compiled a COVID-19 Resource Center at vlcpa.com, Here, you can find numerous resources, specific to your industry, to help you navigate these difficult times. For any questions related to this article, contact Emir Hodzic at firstname.lastname@example.org or 800.887.0437.