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PPP Update – Owner Compensation & Non-Payroll Costs

Posted on September 3, 2020 by

Tim Hilligoss

Tim Hilligoss

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The constant flurry of updates surrounding the Paycheck Protection Program (PPP) has finally subsided. The Small Business Administration (SBA) has started processing loan forgiveness applications, stopped accepting new loan applications and continues to address borrower questions. One reason for the lack of updates may be the standstill in Congress to pass legislation providing additional economic relief. Last month, Congressional leaders and the White House attempted to negotiate a stimulus bill which among other things would have modified the PPP. Since efforts were not fruitful the program has proceeded at an unusually quiet pace. It is against this backdrop that on August 24, 2020, Treasury issued an updated Interim Final Rule which addresses forgiveness related to owner compensation and certain non-payroll costs. To help clients, prospects, and others, Clayton & McKervey has provided a summary of key information below.

Owner-Employee Compensation Rule

There has been confusion about whether an individual with ownership in a PPP borrower is exempt from the owner-employee compensation rule when determining loan forgiveness. Remember, guidance published on June 26, 2020 places a limit on the amount of loan forgiveness possible for payroll compensation made to an owner-employee. However, it is likely there are some owner-employees that have a small percentage of ownership and no meaningful ability to influence how loan proceeds are used. To address this unique situation, the Treasury has stated that owner-employees with less than 5% ownership in either a C corporation or S corporation are not subject to the owner-employee compensation rule.

Eligibility of Non-Payroll Costs

Many borrowers have inquired whether amounts attributable to the operation of a tenant or home-based business are eligible for forgiveness. No, these non-payroll costs are not eligible for forgiveness. There were two examples included which have been listed below.

  • If a borrower rents an office building for $10,000 per month and subleases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
  • A borrower works out of his or her home. When determining the amount of non-payroll costs that are eligible for forgiveness, they may include only the share of covered expenses deductible on the borrower’s 2019 tax filings, or if a new business, those expected for the 2020 tax filings.

Finally, there were also questions about whether rent payments to a related third-party are eligible for forgiveness. The IFR affirms these payments can be forgiven as long as two conditions are met. First, the amount of loan forgiveness required can be no greater than the mortgage interest owed during the Covered Period attributable to the space rented by the business. Second, both the lease and mortgage must have been entered into prior to February 15, 2020. It is important to note that any ownership in common between the business and property owner is considered related for forgiveness purposes.

Contact Us

While the pace of PPP updates has slowed it does not mean questions about loan forgiveness have stopped. The recent guidance provides important details to those navigating the forgiveness process. If you have questions about the information provided above or need assistance maximizing loan forgiveness, Clayton & McKervey can help. For additional information call us at 248-208-8860 or click here to contact us. We look forward to speaking with you soon.

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Tim Hilligoss

Shareholder, Tax & Assurance

As a trusted advisor, Tim guides clients through business transactions, tax issues and international expansion.

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