On August 24, the SBA issued their latest Interim Final Rule on PPP loan forgiveness. The rule covered three areas. The first has to do with owners of a business that have less than 5% ownership. The second and third areas pertain to rent expense. The clarifications under rent expense address situations when a company subleases its space and when the business leases from a related party.
Eligible payroll costs for employees include wages, health insurance, and retirement funds paid during the covered period. The covered period is 24 weeks from the date loan proceeds were received if they were received after June 4, 2020. If PPP loan proceeds were received before June 5, 2020, the business could select 8 weeks or 24 weeks.
PPP forgiveness limits compensation for any individual to no more than $100,000 prorated over the number of weeks in the covered period. For example, if a business were to select an 8-week covered period, no employee would be allowed compensation of more than $15,385. The calculation is done by taking $100,000, dividing it by 52 weeks ($1,923.08 per week), and multiplying by 8.
A second rule states that owners, even if the 24-week covered period is selected, are eligible for no more than two and a half months of compensation. This is calculated as $100,000 divided by twelve ($8,333) multiplied by two and a half ($20,833).
The Interim rule states owner-employees with less than a 5 percent ownership in a C or S Corporation are not subject to this rule. The rule does not cover partners in partnerships or members in LLCs that own less than 5%. It only covers C and S Corporation shareholders. It also does not address S corporation shareholders that own 2% or more but less than 5%. S corporation shareholders that own at least 2% of an S Corporation have their health insurance added to wages, and therefore their compensation, including health insurance, is capped at $100,000 prorated.
These owners are allowed an additional amount for retirement contributions. C corporation shareholders are entitled to a prorated salary of $100,000 plus health insurance and retirement contributions. A question remains as to whether individuals owning more than 2% but less than 5% of an S Corporation are allowed to prorate compensation and add health insurance and retirement benefits. The health insurance would still be included in their salary, which was the justification given for not allowing it as an additional forgivable amount; however, this rule states these individuals are not treated as owners.
Businesses with rent expense but sublease a portion of their space are limited on the amount of rent eligible for PPP forgiveness.
The rule offers this example: A business pays $10,000 per month in rent and sub-leases a portion of their space for $2,500 per month. Only $7,500 is eligible for PPP forgiveness.
The same logic applies to mortgage interest. If a business sub-leases 25% of its space, only 75% of the mortgage interest is allowable for forgiveness.
Borrowers that share space with another business “must prorate expenses in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.”
Borrowers taking the home office deduction are limited to the “share of covered expenses deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.”
RELATED PARTY RENT
If a business leases from a related party, the rent expense is eligible for forgiveness as long as the rent expense “is no more than the amount of mortgage interest owed on the property during the covered period.” The rationale behind this rule is that if the related party is applying for forgiveness, they would be limited to mortgage interest. Therefore, the SBA does not want the related lessee to be better positioned than the owner.
In addition, the lease must have been entered into before February 15, 2020.
For guidance on CARES Act tax matters, please contact Lee Schmidt or other members of the A. L. Schmidt CPA Tax Practice.
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