Related Party Rent Limitation
Per the PPP rules, borrowers must spend 60% of their forgiveness amount on payroll and 40% on other qualified expenses, such as rent. While these percentages haven’t changed, the new guidance aims to equalize the treatment of business owners who own their property in a separate entity and those who hold property in the same entity as their primary business. This new rule won’t affect most borrowers who rent their office space from an unrelated entity. However, if you own a separate entity that holds your office space and you pay rent to that entity, that rent may no longer be a qualified use of PPP funds.
Per the previous PPP rules, the amount of forgiveness requested for employee compensation for the 24-week period is three times the 8-week limit. For owner-employee compensation, if using an 8-week covered period, the amount of forgiveness requested cannot exceed 8 weeks’ worth of 2019 compensation (the lesser of $15,385 or 15.385%)[i]. However, If the borrower elects to use a 24-week covered period, the owner-employee compensation is capped at 2.5 months’ worth of 2019 compensation (the lesser of $20,833, or 20.833%)[ii].
To protect employees with small amounts of company ownership, who likely can’t influence how their company uses PPP funds, the new guidance exempts owner-employees with less than 5% ownership in an S or C corp from the PPP owner-employee compensation rule.
Sub-Tenant Expenses and Working From Home
The SBA has stated that the amount of loan forgiveness requested for nonpayroll costs (the 40% portion) may not include any money that may have been requested for forgiveness by a tenant or sub-tenant of the PPP borrower or for home-based business household expenses. The guidance provides four examples:
- 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 has a mortgage on an office building it operates out of, and it leases out 25% of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to 75%.
- A 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.
- A borrower works out of his or her home. When determining the amount of nonpayroll 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.
We’re All in
As always, we’re here for you. If you have any questions or comments, send us a message using the form below or call us at (410) 363-7211.
[i] Calculated by dividing 8 weeks by the 52 total weeks in a year. The maximum amount of gross yearly compensation the SBA will consider for PPP forgiveness is $100,000.
[ii] Calculated by dividing 2.5 months by the 12 months in a year. The maximum amount or gross yearly compensation the SBA will consider for PPP forgiveness is $100,000
Let's Keep The Conversation Going
Send Maggie Jencik a note.