The Small Business Administration (“SBA”) recently issued a new interim final rule clarifying whether paycheck protection program (“PPP”) loan proceeds may be used for certain payroll and nonpayroll costs and remain eligible for forgiveness, notwithstanding earlier guidance or uncertainty. Generally, PPP loans may be forgiven so long as used for a borrower’s payroll costs (generally, all compensation, capped at $100,000 on an annual basis, plus benefits) and certain mortgage interest, rent and utility expenses. Various guidance in the wake of the implementation of PPP loans has further refined how proceeds may be used to remain eligible for forgiveness. This recent rule provides helpful guidance for two common arrangements: employee stock awards and rent payments to related parties.
Owner-employees owning less than a 5% interest in a C- or S-corporation are not subject to the owner-employee compensation restriction.
Earlier guidance provided that forgiveness of PPP proceeds used to compensate owner-employees was subject to a cap equal to 2.5 months of their 2019 compensation (not to exceed $20,833).[1] This guidance provided no exception for those employees who, for example, may own only a nominal share of a corporation due to employee stock grants. Thankfully, this new rule will remove any owner-employee who holds less than 5% of a corporation from the forgiveness cap. In promulgating this revised rule, the SBA recognizes that such owner-employees are likely not able to meaningfully exercise influence over how PPP loan proceeds are used.
Rental payments to a related party are eligible for forgiveness, but may be subject to restriction.
Rental payments, so long as paid pursuant to a lease in force prior to February 15, 2020, are nonpayroll costs eligible for forgiveness. The recently released rule, though, may limit the amount eligible for forgiveness where a borrower is making rental payments to a related party. In those circumstances, rental payments are eligible for forgiveness only so long as (1) the amount of loan forgiveness requested for rental payments to a related party is no more than the amount of mortgage interest on the property during the 24-week (or, if applicable, 8-week) covered period applicable to the rented space, and (2) both the lease and the mortgage must have been in force prior to February 15, 2020. The SBA intends for this rule to maintain equitable treatment between a borrower that owns property itself and one that holds property through a separate, but related legal entity. While this imposes an additional limitation, the guidance does provide helpful clarity, given it is not uncommon for businesses to separate their operations and property holdings into separate legal entities. Borrowers who are impacted by this rule may maximize their forgiveness by continuing to make rental payments over their extended 24-week covered period, keeping in mind, however, that no more than 40% of PPP loan forgiveness amounts may be attributable to nonpayroll costs.
[1] This cap assumes a 24-week covered period. PPP loans made before June 5, 2020 may have an 8-week covered period, if the borrower elects to do so. In the case of an 8-week covered period, the amount of PPP proceeds that could be used to compensate an owner-employee and remain eligible for forgiveness is capped at 8 weeks of 2019 compensation (not to exceed $15,385).
Burr & Forman has a dedicated team to counsel individuals, businesses and financial institutions in government audits, investigations and defense related to the Paycheck Protection Program (PPP) and Coronavirus Aid, Relief and Economic Security (CARES) Act. The PPP and CARES Act Audit, Investigations and Defense Team represents and advises clients in audits and investigations involving PPP loans and tax benefits that may have been claimed under the CARES Act. This multidisciplinary team combines more than 230 years of legal experience and attorneys with previous government positions, including attorneys with IRS Chief Counsel, the United States Department of Justice, and United States Attorneys’ Offices.
If you would like to speak to an attorney about a legal issue you are facing, please contact a member of our PPP and CARES Act Audit, Investigations and Defense Team, the COVID-19 Response Team , or your Burr attorney.