SBA Provides Relief for Some “Owner-Employees” but Limits Forgiveness of Certain Non-Payroll Costs Under the PPP
In yet another interim final rule released yesterday, the Small Business Administration (SBA) loosened limitations for calculating forgiveness for compensation of certain “owner-employees,” but limited “non-payroll” costs eligible for forgiveness.
These updates are critical for all PPP loan borrowers, but are especially important for those who are now seeking forgiveness after the conclusion of an 8-week covered period.
The Less Than 5% “Exclusion” for Owner-Employees
In yesterday’s rule, the SBA created an exception to caps and limitations for “owner-employees” that hold less than a 5% stake. For these “owner-employees,” forgiveness of their compensation will be calculated under the same rules for other employees and not capped and limited as stated below.
Under a previous rule, the SBA had stated that for purposes of forgiveness, the compensation of an “owner-employee” of a C or S corporation would be capped at:
- for an 8-week covered period – the lesser of 8/52 of eligible 2019 compensation or $15,385; and
- for a 24-week covered period – the lesser of 2.5/12 of eligible 2019 compensation or $20,833.
Eligible 2019 compensation for C corporation “owner-employees” included cash and health and retirement benefit compensation. For S corporation “owner-employees,” it only included cash compensation, potentially a significant limitation.
Limitation of Non-Payroll Costs Eligible for Forgiveness
In addition, the SBA provided important guidance as to the eligibility of non-payroll costs for forgiveness.
Impact of Tenants or Subtenants
In particular, the SBA stated that amounts attributable to a tenant or subtenant may NOT be included. For example, if a PPP borrower had a monthly rental obligation of $10,000, but sublet a portion of space to a third party for $2,500 per month, only $7,500 could be counted toward forgiveness.
Also, where a PPP borrower was subject to monthly mortgage interest expense of $1,000, but subleased space to a third party which space would be considered as 25% of the fair market value of the total space involved, only $750 of interest expense would be eligible for forgiveness.
In addition, where forgiveness is sought for utility expenses, if there is a tenant or subtenant paying rent covering a portion of total utility expenses for the property, that amount would need to be netted against total utility amounts claimed for forgiveness.
Special Rules for Expenses Paid to “Related Parties”
Rent paid to a “related party” (undefined in the rule) is eligible for forgiveness “as long as the amount of the forgiveness requested . . . is no more than the amount of the mortgage interest owed on the property for the covered period attributable to the space rented.” What if there is no mortgage interest applicable? Unfortunately, the SBA did not answer that question.
But, interestingly enough, mortgage interest payments to a “related party” are NOT eligible for forgiveness. These payments for some reason are considered as payments back to a “business owner” and not eligible as a true overhead expense.
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The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings, and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. In some cases, the underlying legal information is changing quickly in light of the COVID-19 pandemic. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Please contact your legal counsel for advice regarding specific situations.