On Aug. 24, the Small Business Administration (SBA) released an Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs.
The interim final rule (IFR) clarifies the applicability of previously issued IFRs regarding the reporting of compensation for certain classes of owner-employees.
It also provides new guidance on how to consider certain nonpayroll costs, including related party rents and costs associated with as the business operations of tenants, sub-tenants, and co-tenants or with home-based businesses.
Following is a breakdown of what we know as of this column’s writing, Aug. 27:
Owner-employees
Previous guidance related to the reporting of payroll costs for owner-employees, which capped the amount of loan forgiveness for payroll compensation attributable to an owner-employee, provided no exception based on the owner-employee’s percentage of ownership.
The new IFR provides that the owner-employee rules are not applicable to owner-employees with less than a 5% ownership stake in a C- or S-corporation.
Owner-employees with less than a 5% ownership stake should be included in either table 1 or table 2 of schedule A and use amounts paid during the covered period or alternative payroll covered period, rather than use 2019 earnings as set forth in the previous guidance.
Related party rent
Since the inception of the Paycheck Protection Program (PPP), the question of “how will related party rents be considered” has been a hot topic of conversation, given the pervasive nature of these types of arrangements in small businesses. The guidance provided, while not favorable to the borrower, settles the topic.
According to the new IFR, related party rent is eligible for forgiveness, but only to the extent that it represents the mortgage interest owed on the underlying property attributable to the space being rented by the borrower.
Therefore, if monthly rent is $5,000 and monthly mortgage interest on the building is $3,000, only $3,000 of the rent would be eligible for forgiveness. The guidance also reiterates the requirement for both the lease and the underlying mortgage to be in place as of Feb. 15, 2020.
Many borrowers based their initial forgiveness calculations on the full amount of rent being paid. This is especially problematic if the subject property did not have a mortgage, which effectively reduces the forgiveness to zero.
Nonpayroll costs attributable to the operations of a tenant, co-tenant or sub-tenant
Amounts related to the business operations of a tenant, co-tenant, or sub-tenant of the borrower are not eligible for forgiveness. Consider these examples from the IFR:
Sub-leases: For a PPP borrower that rents an office building for $10,000 per month and sub-leases a portion of the space to another business for $2,500, only $7,500 per month is eligible for loan forgiveness.
• Tenants: If the borrower owns a building subject to a mortgage and leases a portion of the building to one or more other business, the portion of the mortgage interest that is eligible for loan forgiveness is limited to the percentage share of the space that is not leased out to the other business(es).
• Co-Tenants: If the borrower shares a rented space with another business, only borrower’s share of the rent and utilities – prorated in the same manner as on the borrower’s 2019 tax filings – is eligible for loan forgiveness.
Nonpayroll costs for home-based businesses
For home-based businesses, costs eligible for loan forgiveness are limited to the portion of covered expenses that were deductible on the borrower’s 2019 tax filings or, for a new home-based business, to the portion that is expected to be deductible on the borrower’s 2020 tax filings.
We recommend that borrowers recalculate the payroll required to be able to be eligible for full loan forgiveness. There is still time (assuming you are using the 24 week payroll period) to change head count, salaries, etc.
This article is general in nature. Consult with a CPA to determine how your specific facts apply to these new rules. CLA’s Jack Rybicki and Rich Tower assisted with this article.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. He’s also the host of “Bosma on Business,” which airs Saturdays at 10 a.m. on Newstalk 780 KOH. Reach him for comment at mike.bosma@claconnect.com.
-->On Aug. 24, the Small Business Administration (SBA) released an Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs.
The interim final rule (IFR) clarifies the applicability of previously issued IFRs regarding the reporting of compensation for certain classes of owner-employees.
It also provides new guidance on how to consider certain nonpayroll costs, including related party rents and costs associated with as the business operations of tenants, sub-tenants, and co-tenants or with home-based businesses.
Following is a breakdown of what we know as of this column’s writing, Aug. 27:
Owner-employees
Previous guidance related to the reporting of payroll costs for owner-employees, which capped the amount of loan forgiveness for payroll compensation attributable to an owner-employee, provided no exception based on the owner-employee’s percentage of ownership.
The new IFR provides that the owner-employee rules are not applicable to owner-employees with less than a 5% ownership stake in a C- or S-corporation.
Owner-employees with less than a 5% ownership stake should be included in either table 1 or table 2 of schedule A and use amounts paid during the covered period or alternative payroll covered period, rather than use 2019 earnings as set forth in the previous guidance.
Related party rent
Since the inception of the Paycheck Protection Program (PPP), the question of “how will related party rents be considered” has been a hot topic of conversation, given the pervasive nature of these types of arrangements in small businesses. The guidance provided, while not favorable to the borrower, settles the topic.
According to the new IFR, related party rent is eligible for forgiveness, but only to the extent that it represents the mortgage interest owed on the underlying property attributable to the space being rented by the borrower.
Therefore, if monthly rent is $5,000 and monthly mortgage interest on the building is $3,000, only $3,000 of the rent would be eligible for forgiveness. The guidance also reiterates the requirement for both the lease and the underlying mortgage to be in place as of Feb. 15, 2020.
Many borrowers based their initial forgiveness calculations on the full amount of rent being paid. This is especially problematic if the subject property did not have a mortgage, which effectively reduces the forgiveness to zero.
Nonpayroll costs attributable to the operations of a tenant, co-tenant or sub-tenant
Amounts related to the business operations of a tenant, co-tenant, or sub-tenant of the borrower are not eligible for forgiveness. Consider these examples from the IFR:
Sub-leases: For a PPP borrower that rents an office building for $10,000 per month and sub-leases a portion of the space to another business for $2,500, only $7,500 per month is eligible for loan forgiveness.
• Tenants: If the borrower owns a building subject to a mortgage and leases a portion of the building to one or more other business, the portion of the mortgage interest that is eligible for loan forgiveness is limited to the percentage share of the space that is not leased out to the other business(es).
• Co-Tenants: If the borrower shares a rented space with another business, only borrower’s share of the rent and utilities – prorated in the same manner as on the borrower’s 2019 tax filings – is eligible for loan forgiveness.
Nonpayroll costs for home-based businesses
For home-based businesses, costs eligible for loan forgiveness are limited to the portion of covered expenses that were deductible on the borrower’s 2019 tax filings or, for a new home-based business, to the portion that is expected to be deductible on the borrower’s 2020 tax filings.
We recommend that borrowers recalculate the payroll required to be able to be eligible for full loan forgiveness. There is still time (assuming you are using the 24 week payroll period) to change head count, salaries, etc.
This article is general in nature. Consult with a CPA to determine how your specific facts apply to these new rules. CLA’s Jack Rybicki and Rich Tower assisted with this article.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. He’s also the host of “Bosma on Business,” which airs Saturdays at 10 a.m. on Newstalk 780 KOH. Reach him for comment at mike.bosma@claconnect.com.
