PPP Interim Final Rule Update
Finally, we have are given some guidance that will ease some minds but aren't favorable for all the PPP Loan Borrowers. Let's hope more will follow soon!
Recently the Small Business Administration (SBA) provided a new Interim Final Rule (IFR) giving a little guidance to business owners that are seeking forgiveness. The 2 major changes include owner-employee limitations and the related party rent payments. It doesn't address the needs of every business owner that is seeking the forgiveness of their Paycheck Protection Program Loan but it's a start.
- Owner-Employee of a S or C Corp with less than 5% isn't subject to the compensation rule since they don't have any meaningful ability to influence decision on the loan allocations. This is for corporate entities and not partnerships or limited liability companies. So, for those that are shareholders with 5% or more will be subject to the owner-employee limitations.
- The major change is that the related party rent payments are now limited to mortgage interest, and payment of mortgage interest to a related party is now disallowed.
The IFR provides four examples that make clear that:
1) rent paid to the borrower from a subtenant reduces the eligible rent expense,
2) mortgage interest for a mortgage that covers property subject to a lease to a third party must be reduced pro rata by the percentage (by fair market value) of the property which is leased out
3) for shared spaces, utility payments must be similarly allocated
4) home office expenses are limited to proration as set forth on 2019 taxes (or as expected for 2020 taxes if a new business).
- A new cap on loan forgiveness is available for rent paid to related parties to no more that the amount of mortgage interest owed on the property during the covered period in question that is attributable to the space being rented by the business, and only to the extent that both the lease and the mortgage were in place prior to Feb. 15, 2020.
According to attorneys, Holland&Knight, “The term “related party” is not addressed in the statutory language of the CARES Act or previously in prior rules and is thus described in the IFR as including “any ownership in common between the business and the property owner.”
So, until there is more guidance it is advised you to remind your clients to keep invoices and expenses documented and in order.