On August 25th the Treasury Department issued additional guidance related to owner-employees and related party rents and mortgages. The Small Business Administration is currently accepting PPP Loan Forgiveness applications, but regulatory guidance and legislative changes are still possible. Borrowers should consider delaying their forgiveness applications until additional guidance is issued and determine the impact of pending legislation.
Who is subject to the owner compensation rules for PPP loan forgiveness?
Under previous guidance, the Treasury department stated that borrowers who elect the 24 week forgiveness period have increased forgivable payroll costs for non-owner employees, from $15,385 over the 8 week period to $46,154 over the 24 week period. However, in order to prevent owner-employees from an unintended windfall from the program, owner-employees are limited to $15,385 under the 8 week election or $20,833 under the 24 week election. In this new guidance, if the borrowing entity is a C or S Corporation for tax purposes, employees with less than a 5% ownership interest in the entity are not considered owners for the purposes of the limited owner compensation forgiveness expenses and the related payroll costs for forgiveness are either $15,385 over the 8 week period to $46,154 over the 24 week period. There is still guidance needed to determine if the rules of attribution apply in this instance. For example, if a parent and child each own a 4% interest in a S corporation it is unclear if they would have to treat their ownership interest as 8% and therefore each be limited to $20,833 for the 24 week period.
Are related party expenses eligible for PPP loan forgiveness?
The additional guidance clarifies related party rental expenses are eligible for forgiveness to the extent of the mortgage interest on the property paid to an unrelated party. However, mortgage interest from related-party financed real estate holdings are not eligible for PPP forgiveness. The SBA clarified the intent in the guidance:
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.
What other items reduce eligible rental expenses or mortgage interest?
The Treasury Department has clarified that income from subleased property, shared rent agreements between entities, and portions of interest or rent related to personal use property will all reduce eligible rental expenses. Borrowers with these situations should reach out to their Mitchell Wiggins representative for additional consultations on reduction of eligible costs.
When should borrowers begin applying for loan forgiveness?
Borrowers have ten months from the end of the forgiveness expenditure covered period to apply for forgiveness before PPP loan repayment will begin. The Treasury Department is still issuing guidance regularly related to eligible expenses and calculations of limitations. In addition, multiple bills have been introduced in Congress that include substantial changes to the forgiveness application process. Borrowers should assess the complexity of their forgiveness application, including reductions in salaries, full time equivalent employees and related party transactions to determine if adequate guidance has been issued to accurately file for forgiveness of a PPP loan.