On August 24, 2020, Treasury issued a new Interim Final Rule (IFR) which provides important new details on the Paycheck Protection Program (PPP) loan forgiveness. This is one of the first updates to the PPP in a while as broader changes have stalled with the additional economic stimulus package still being negotiated in Washington. The IFR addresses issues related to the owner-employee compensation rule and eligibility of certain non-payroll expenses. Although some of the information has been covered in the past there are important new details Denver borrowers need to consider. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
Owner-Employee Compensation Rule
The first part of the IFR deals with the owner-employee compensation rule and whether the percentage limit exemptions should be permitted. Remember, under existing regulations, issued on June 26, 2020, the amount of loan forgiveness an owner-employee was eligible to receive was limited to 8 weeks of 2019 compensation with a maximum of $15,385 (8 week Covered Period) or $20,833 (24 week Covered Period). No exception is permitted based on the percentage of ownership. However, this ignores the fact that many with a small percentage of ownership likely have no real influence over how loan funds are spent. As a result, the IFR changed the rule to permit any owner-employee with less than a 5% ownership to be exempt from the compensation rule.
The second part addresses questions related to certain non-payroll expenses.
Many have inquired whether amounts attributable to the operation of a tenant or home-based business are eligible for forgiveness. No, these non-payroll costs are not eligible. There were examples included which are listed below.
- 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.
- 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 share of the fair market value of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.
- A borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the borrower 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. Example 4: A borrower works out of his or her home. When determining the amount of nonpayroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
There was also confusion about whether rent payments to a related third party are eligible for loan forgiveness. Yes, these expenses are eligible for forgiveness when two conditions are met. First, the amount requested for rent or lease payments made to a third party cannot exceed the mortgage interest owed during the Covered Period for the corresponding space. Second, the lease and mortgage must have been entered into prior to February 15, 2020.
The information provided in the IFR provides important details necessary to maximize loan forgiveness. Given the complexity of the process, it is important to work with a qualified advisor that can guide you through the process. If you have questions about the information provided above or need assistance with loan forgiveness, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.