The U.S. Small Business Administration (SBA) has issued further guidance to clarify the loan forgiveness provision of the Paycheck Protection Program (PPP) part of the CARES Act. In particular, the new guidance addresses questions about the eligibility for forgiveness of owner compensation and specific non-payroll costs.
In response to public questions about C- and S-Corporation ownership, the SBA guidance indicates that payroll to owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation are now exempted from the owner-employee compensation rule, which caps the amount of loan forgiveness for payroll allocated to an owner-employee. This exemption is intended to cover owner-employees who have no meaningful ability to influence how loan proceeds are allocated.
A second topic of the new guidance concerns the forgiveness eligibility of non-payroll expenses for home-based businesses and business operations of a tenant or sub-tenant of a PPP loan recipient. The SBA has ruled that payment of household expenses for a home-based business or costs attributed to tenant or sub-tenant operational expenses are NOT eligible for the PPP loan forgiveness calculation. Borrowers must pro rate shared rented space costs and home office costs in the same manner as on the borrower’s 2019 tax filings, or if a new business, on the borrower’s expected 2020 tax filings.
Finally, rent payments to a related party are eligible for loan forgiveness provided the amount used for calculating forgiveness is no more than the mortgage interest owed on the property, and the lease and mortgage were entered into prior to February 15, 2020. The PPP borrower must provide mortgage interest documentation to substantiate these payments. Also, 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.
Forgiveness of a PPP loan is an important piece of the financial and operational puzzle for many small businesses. The process can be complicated and require significant documentation. If you have any questions about a PPP loan and loan forgiveness, please contact Gray, Gray & Gray at (781) 407-0300.