Owner-employees with less than a 5% ownership stake in a C or S corporation are not subject to the cap provided for in the FAQs.

On August 24, 2020, the Treasury Department and Small Business Administration (SBA) released a new interim final rule on certain aspects of the loan forgiveness process for Paycheck Protection Program (PPP) loans.

A few key highlights of the new interim final rule are:

• Owner-employees that hold less than a 5% stake in the business are not subject to the cap for owner-employee compensation eligible for loan forgiveness.
• Borrowers may not apply for loan forgiveness for expenses attributable to tenant or subtenant payments.
• Rent payments made to related parties are eligible for loan forgiveness in certain circumstances. Mortgage payments made to related parties, however, are not eligible for loan forgiveness.

Payroll Costs Eligible for Loan Forgiveness

Owner Compensation

The new interim final rule makes clear that owner-employees of a C or S corporation that applied for a PPP loan with more than a 5% stake in the entity will be subject to a cap for compensation paid to such owner-employee that is eligible for loan forgiveness, while owner-employees who hold less than a 5% stake in the borrower entity may be paid a higher amount from the business that is eligible for loan forgiveness.

As the SBA clarified in the FAQs previously released on August 11, 2020, the compensation for an owner-employee paid from the borrower across all businesses in which he or she has an ownership stake is capped at $20,833 in the aggregate per individual for businesses using the 24-week loan forgiveness period and $15,385 per individual for businesses using the eight-week loan forgiveness period (for PPP loans received before June 5, 2020). Therefore, this cap applies to compensation paid to any owner-employee of a PPP loan borrower who holds more than a 5% stake in the borrower entity.

Owner-employees with less than a 5% ownership stake in a C or S corporation are not subject to the cap provided for in the FAQs. Instead, owner-employees who hold less than a 5% stake in the borrower entity are subject to the ordinary cap on employee compensation eligible for loan forgiveness, which is $46,154 per employee for a borrower using the 24-week loan forgiveness period and $15,385 per employee for borrowers using the eight-week loan forgiveness period. According to the SBA, this exemption is intended to cover owner-employees who “have no meaningful ability to influence decisions over how loan proceeds are allocated.”

As an example, a borrower with four owner-employees who are paid compensation from the borrower entity may apply for forgiveness in the following amounts, with respect to their respective ownership stake in the borrower entity:[1]

1. For Owner-Employee A, who holds a 50% stake in the business, the borrower may apply for up to $15,385 of their compensation to be forgiven.
2. For Owner-Employee B, who holds a 42% stake in the business, the borrower may apply for up to $15,385 of their compensation to be forgiven.
3. For Owner-Employee C, who holds a 4% stake in the business, the borrower map apply for up to $46,154 of their compensation to be forgiven.
4. For Owner-Employee D, who also holds a 4% stake in the business, the borrower map apply for up to $46,154 of their compensation to be forgiven.

Nonpayroll Costs Eligible for Loan Forgiveness

Payments Between Borrowers and Tenants/Subtenants; Household Expenses; Mortgage Interest

Any expenses attributable to the business operation of a borrower’s tenant or subtenant are not eligible for loan forgiveness. In addition, household expenses for home-based businesses are not eligible for loan forgiveness.

As an example, if a business subleases part of its space to another business in exchange for a sublease rent payment, the amount of the sublessor’s rent payment is not eligible for loan forgiveness. To the extent that a business shares rented space, the business must prorate rent and utility payments in the same manner as on the business’ 2019 tax filings (or expected 2020 tax filings).

A second example relates to the forgiveness of mortgage interest payments. If a borrower owns an office building with a mortgage and leases a portion of the space to a tenant, the portion of mortgage interest that is eligible for loan forgiveness is limited to the share of the fair market value of the space that is not leased to other businesses. If the leased space represents 25% of the fair market value of the office building, the borrower may then only claim forgiveness on 75% of the mortgage interest.

Rent Payments to Related Parties

Rent payments made to a related party are eligible for loan forgiveness if the following criteria are satisfied:

1. The amount of loan forgiveness requested for rent or lease payments to the related party is no more than the amount of mortgage interest owed on the property during the loan forgiveness period that is attributable to the space being rented by the business; and
2. The lease and the mortgage were entered into before February 15, 2020.

A business must provide mortgage interest documentation to its lender as evidence for any such payments.

Note that while rent or lease payments to a related party may be eligible for loan forgiveness, mortgage interest payments to a related party are not eligible for loan forgiveness. The SBA stated that this different treatment stems from the fact that the PPP loan program is designed to assist with certain obligations owed to third parties of borrowers, not payments to an owner of a borrower that result from the corporate structure of the business.

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