Skip to main content

New PPP Loan Forgiveness Guidance – Treatment of Owners and Forgiveness of Certain Non-Payroll Costs

Gregory Pfeuffer

September 01, 2020

On August 24, 2020, the SBA released new guidance in the way of Interim Final Rule (RIN 3245-AH56, docket SBA-2020-0044). This new guidance indicates:

  • Owner-employees with less than five percent ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule capping amounts eligible for loan forgiveness for owner-employees.
  • The amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower.
  • Rent payments due to a related party are eligible for forgiveness as long as (1) the amount of loan forgiveness requested for rent or lease payments is no more than the mortgage interest owed on the property during the Covered Period attributable to the space being rented by the business; and (2) the lease and the mortgage were entered into prior to February 15, 2020.

Q: Are individuals with an ownership stake in a PPP borrower exempt from application of the PPP owner-employee compensation rule when determining the amount of their compensation eligible for loan forgiveness?

A: Yes, owner-employees with less than five percent ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule. The First Loan Forgiveness Rule, as revised by the Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, 85 FR 38304, 38307 (June 26, 2020), caps the amount of loan forgiveness for payroll compensation attributable to an owner employee. There is no exception in the rule based on the owner-employee’s percentage of ownership. The Administrator, in consultation with the Secretary, has now determined that an owner-employee in a C- or S-Corporation who has less than five percent ownership stake, will not be subject to the owner employee compensation rule. This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.

Q: Are amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, in the context of home-based businesses, household expenses, eligible for forgiveness?

A: No, the amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses.

Q: Are rent payments to a related party eligible for loan forgiveness?

A: Yes, as long as (1) the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the mortgage interest owed on the property during the Covered Period attributable to the space being rented by the business; and (2) the lease and the mortgage were entered into prior to February 15, 2020.

Any common ownership between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments. 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 owed to third parties, not payments to a business owner that occur because of how the business is structured. This will maintain equitable treatment between a business owner that holds property in a separate entity, and one that holds the property in the same entity as its business operations.

Please reach out to your Mueller Prost specialist with any questions on PPP Loans or our Loan Forgiveness Advisory Services.

Image of a woman at a computer with the words "Put our expertise to work. We combine deep industry knowledge, experience and innovation to solve your company's most complex problems." Click to talk to an advisor.

Unlock industry secrets.

Mueller Prost insights, delivered right to your inbox.

Sign Up.

Related Insights