New PPP Rules from SBA
New PPP rules from the SBA on September 1! The U.S. Small Business Administration, which administers the Payroll Protection Program (PPP), began accepting loan forgiveness applications Aug. 10. Just two weeks later, the agency, in conjunction with the Treasury Department, released additional guidelines surrounding forgiveness of the pandemic loans designed to keep workers on payrolls.
If you’re an owner and you thought you were clear on how to apply for PPP loan forgiveness, the SBA this week released another interim final rule that adds even more complexity to certain areas of forgiveness. Some of the new provisions could work in your favor—or against you—depending on your business type and how you used your funds.
In general, PPP loans are forgivable if your business used at least 60% of the loan for eligible payroll costs over a span of 24 weeks. Non-payroll costs, including mortgage interest, business rent and utilities are also eligible for forgiveness, but the new rules tweak certain eligibility requirements. Here’s what’s changed.
Some Owner-Employees Can See More Salary Forgiveness
The new guidelines state that an owner-employee in a C- or S-corporation who has less than a 5% ownership stake will not be subject to the owner-employee compensation rule, which caps the amount of loan forgiveness on owner-employee compensation.
Prior to the change, the owner-employee compensation rule stated that anyone with a stake in a company—no matter how small—that took out a PPP loan was eligible for forgiveness of the lesser of $20,833 or 20.833% of their 2019 compensation or $15,385 or 15.385% if the borrower elected to use an eight-week covered period.
The updated guidance means that if you have an equity stake under 5% in your company, you are now eligible for more salary forgiveness—up to $46,154 per individual over 24 weeks. In addition, covered benefits like health care expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer would also be eligible for forgiveness.
No Forgiveness For Home Office or Tenant Expenses
If you rent out a portion of your office, you will not receive forgiveness for the portion of the rent your tenant pays you. For example, if you sublease some of your office space and they pay you one-third of your total monthly rent, you are only entitled to forgiveness on the two-thirds of the rent you pay.
The reverse also holds true. If you sublease your office space, you’re only eligible for forgiveness on your business’ portion of the total monthly amount. If you pay a portion of the utility bills for that space, you’ll only receive forgiveness for the portion of the bill you pay. And, home office expenses are only forgivable based on the prorated amount you claimed as a deduction on your 2019 tax filings or the amount you expect to claim on your 2020 filings.
Mortgage Interest Payments: It’s Complicated
The revised guidelines also include changes to the forgiveness rules for businesses that own the building where they pay rent. Here’s how it works: If Business A holds any ownership interest in Business B, which owns the building, Business A is now considered “related” to Business B.
This makes Business A eligible for forgiveness only for the portion of the rent or lease payments to Business B equal to or less than the amount of mortgage interest Business B pays on the property. One more caveat: All of this only applies when the lease and the mortgage agreement were entered into prior to Feb. 15, 2020.
This rule also means that if Business A is making mortgage payments on Business B’s property, or if Business B owns the building outright, without a mortgage or mortgage interest, Business A won’t receive any forgiveness. That’s a potential penalty for those who were expecting to receive forgiveness on this portion of their loan.
With this new set of rules, owner-employees may not be eligible for as much forgiveness of their PPP loans as they originally thought. New guidelines continue to be rolled out regarding the PPP loan forgiveness process and how to calculate your company’s eligibility. It’s key to stay on top of any new rules and regulations, to make sure your paperwork is up-to-date when you submit for forgiveness. Please contact us if you have any questions about this very confusing process and interpretation of rules!