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SBA Issues Update on Treatment of Owners and Certain Non-Payroll Costs with Regard to PPP Loan Forgiveness

September 2, 2020
Public Finance Advisory 

The Small Business Administration (SBA) began accepting lender loan forgiveness submissions for the Paycheck Protection Program (PPP) on August 10, 2020. Since then, the SBA has provided additional guidance concerning the ownership percentage that triggers the applicability of the 5 percent owner compensation rule and limitations on the eligibility of certain non-payroll costs for forgiveness.

The highlights from the new guidance:

  • Owner-employees with less than a 5 percent ownership stake in a C-corporation or S-corporation are not subject to the owner-employee compensation rule (previous guidance had not established any exception from the rule based on percentage of ownership).
  • The amount of non-payroll costs for which forgiveness is requested may not include any amount attributable to the business operations of a tenant or sub-tenant of the borrower. For example, if a borrower rents an office building for $10,000 per month, and subleases out a portion of the space for $2,500 per month, only $7,500 per month is eligible for forgiveness. Alternatively, if a borrower shares a rented space with another business, the borrower must prorate rent and utility payments in the same manner as on its 2019 tax filings (or 2020 tax filings for new businesses).
  • Rent payments to a related party are eligible for loan forgiveness if (1) the amount of forgiveness requested for the rent payments 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 borrower, and (2) the lease and mortgage were entered into prior to February 15, 2020. Rent and lease payments to a related party may be eligible for forgiveness under this rule, but mortgage interest payments to a related party are not eligible for forgiveness.
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