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SBA Issues Interim Final Rule Clarifying Forgiveness of Related Party Rentals, Sublease Income, and Owner Compensation Limits

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The SBA has been slow to roll out meaningful FAQs and Interim Final Rules (IFR) but did publish a new IFR on August 24, 2020 which has a number of potential implications for PPP loan borrowers and their forgivable expenses. The IFR covers three common forgivable expenses and most importantly for most, places some new limitations on related party rent expenses.

Here are the highlights:

  • For PPP borrowers whose business is a C Corp or S Corp, the IFR clarifies that a shareholder who owns less than 5% of the outstanding shares of the company will not be subject to owner-employee compensation limitation rules established by the SBA. The $100,000 wage limitation for employees and up to $15,385 (8-week covered period) or $20,833 (24-week covered period) for owners remain in place (maximum amounts based on 2.5 months of 2019 annualized salary, capped at $100,000). Businesses with non-owner employees, or owners holding less than 5% of outstanding shares, are eligible for salary forgiveness of up to $15,385 per employee for an 8-week covered period, or up to $46,154 per employee for a 24-week covered period. Although the updated IFR was silent for LLCs and partnerships, forgivable earnings of general partners are currently limited to $20,833 which is their 2019 self-employment earnings (capped at $100,000) multiplied by 2.5/12 or (annualized over 2.5 months). This is the same calculation used for the original loan requested.
  • The IFR places limitations on the inclusion of gross rents in forgivable expenses when the borrower subleases a portion of the related property to another entity. The borrower may only seek forgiveness for the amounts paid on the rents net of any sublease income.
  • The IFR creates rules surrounding forgivable rents paid to related parties. For rentals of real property from related parties, the expense eligible for forgiveness is now limited to the amount of mortgage interest owed by the related party during the covered period. The lease also must have been in place prior to February 15, 2020. The SBA has argued that by limiting the related party rents to only the interest obligation of the related party during the covered period, the program maintains equitable treatment between business owners that hold property in a separate entity with a business which holds similar property within the operating entity.

For the published IFR please see this link.

We are expecting more interim final rulings, SBA FAQs, and other guidance related to loan forgiveness in the coming weeks. We will continue to provide updates as the information is released. For now, we continue to advise patience in completing and submitting loan forgiveness applications to your lender. Additionally, we are available to assist with loan forgiveness application process – for additional information and to have one of our team members contact you, please fill out the intake form linked here.

Berntson Porter is here to help businesses navigate these unprecedented times. Visit our Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.