SBA Issues Interim Final Rule for Paycheck Protection Program (8/24/20)
On August 24, 2020, the U.S. Small Business Administration issued an interim final rule providing guidance on the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The interim final rule addresses topics such as the owner-employee compensation rule, shared spaces with tenants or sub-tenants, and loan forgiveness eligibility for rent payments to related parties. The interim final rule can be accessed here.
Owner-Employee Compensation Rule
Under the previous rules, as amended, the amount of loan forgiveness for payroll compensation contributed to an owner-employee was capped at $15,385 per individual owner-employee (for borrowers electing an eight (8) week covered period) and $20,833 per individual owner-employee (for borrowers electing a twenty-four (24) week covered period). Comparatively, the cap on payroll compensation for employees eligible for loan forgiveness for borrowers electing a twenty-four (24) week covered period is $46,154. Under the latest guidance, owner-employees in a C-Corporation or S-Corporation with less than a five percent (5.0%) ownership stake will not be subject to the owner-employee compensation rule. The rationale for this exemption provided by the Small Business Administration is that it is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
Eligibility of Non-Payroll Costs Associated with Shared Spaces
Loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses. The Small Business Administration provided four examples illustrating the application of this rule:
Example 1: A PPP borrower rents an office building for $10,000 per month and sub-leases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
Example 2: A PPP borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.
Example 3: A PPP borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
Example 4: A PPP borrower works out of his or her home. When determining the amount of non-payroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
Rent Payments to a Related Party
A PPP borrower may include rent payments to a related party in its application for loan forgiveness provided that the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the PPP borrower and provided further that the lease and mortgage were entered into prior to February 15, 2020. It should be noted that in the foregoing scenario, the related party itself would not also be eligible to request forgiveness for this amount (i.e., no double dipping). For purposes of determining whether there is a related party, any ownership in common between the PPP borrower and property owner is sufficient. The borrower will be required to provide its lender with mortgage interest documentation to substantiate the payments.
While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness. The rationale provided by the Small Business Administration for this is that:
PPP loans are intended to help businesses cover certain non-payroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured. This will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.
UKS will continue to monitor this developing issue and provide updates as necessary. The UKS Covid-19 Response Team is standing by, ready to help you and your business with questions or concerns regarding a wide range of legal issues relating to the Covid-19 pandemic. For further information on the Paycheck Protection Program, please contact Attorney John F. (Jef) Wolter, Attorney Gregg J. Lallier, or Attorney John J. Alissi.
Attorney Wolter is a member of the Firm’s Commercial Lending & Banking Practice Group. In the commercial finance area, Attorney Wolter concentrates in the transactional representation of banks, financial institutions, and small business investment companies. Attorney Wolter may be reached at firstname.lastname@example.org or at (860) 548-2645.
Attorney Gregg J. Lallier is the Chair of the Firm’s Venture Capital & Private Equity Practice Group. Attorney Lallier focuses his practice within the technology, private equity, and venture capital industries. Attorney Lallier may be reached at email@example.com or at (203) 786-8313.
Attorney Alissi, currently serving as the Firm’s President, is a member of the Firm’s Commercial Lending & Banking Practice Group. Attorney Alissi represents commercial banks, finance companies and other debt and equity providers in all aspects of commercial lending. Attorney Alissi may be reached at firstname.lastname@example.org or at (860) 548-2619.
Updike, Kelly & Spellacy, PC would like to thank associate Michael J. Paciorek for his contributions to this client alert.
Disclaimer: The information continued in this material is not intended to be considered legal advice and should not be acted upon as such. Because of the generality of this material, the information provided may not be applicable in all situations and should not be acted upon without legal advice based on the specific factual circumstances.