PPP Loan Forgiveness Guidance: What Does It All Mean?

Many Paycheck Protection Program (PPP) loan recipients are in the process of spending down their loan proceeds. Now, these businesses are likely turning toward unpacking the details of how they can maximize their loan forgiveness entitlement.

The Small Business Administration (SBA) and U.S. Treasury Department have released substantial guidance to help organizations understand whether they will be eligible for loan forgiveness and how to calculate the amount that can be forgiven. For owner-employees, some of that guidance will work in their favor, while other aspects of the interim final rule might come as a surprise to those who didn’t anticipate having trouble qualifying for loan forgiveness.

Owner-Employee Compensation Rule

Loan forgiveness for owner-employee compensation is more limited than in the case of wage payments made to traditional employees. Assuming the loan recipient uses a 24-week “covered period,” loan forgiveness on payments to owner-employees is limited to the lesser of $20,833 (2.5 months of a $100,000 annual salary); or the owner’s 2019 compensation multiplied by 2.5/12.

By way of clarification, the SBA interim final rule provides that anyone who own less than 5 percent equity in a C corporation or S corporation is not treated as an owner-employee. Instead, individuals with lower equity stakes are eligible to take advantage of the more generous employee cap, which limits loan forgiveness to $46,154 (which works out to 24 weeks of a $100,000 annual salary).

Loan recipients should also be sure to pay close attention to the headcount and wage reduction rules. To ensure that the business owner has not impermissibly reduced its workforce, the organization should compare its headcount on February 15, 2020, to the either the date on the loan forgiveness application or December 31, 2020, whichever is earlier.

Employers can qualify for loan forgiveness if they rehire laid-off or furloughed employees by the end of the year. There’s also an exception for employers who are unable to rehire people who were employees as of February 15, 2020, or similarly qualified employees for open positions as of December 31.

Related-Party Rent or Lease Payments

Small-business owners who rent space from a related-party entity should also be aware of new restrictions on loan forgiveness for proceeds spent on rent. For purposes of these rules, any commonality in ownership between the parties is sufficient to subject the borrower to the related-party rules.

Amounts spent on rent or lease payments to a related party can be forgiven, but only to the extent that those amounts do not exceed the amount of mortgage interest that the related party owes on the property during the covered period. Loan recipients who are subject to the related-party rule will be required to submit mortgage documents to substantiate the amount of their payments.

Additionally, the mortgage and the lease must have been executed prior to February 15, 2020, in order for payments under the arrangement to qualify for forgiveness. Actual mortgage interest payments made to business owners simply because of the business structure cannot be forgiven.

Likewise, household expenses of a home-based business are not eligible for loan forgiveness, nor are amounts attributable to a sub-tenant or tenant. For example, if a business leases office space for $10,000 per month and rents a portion to a subtenant for $2,500 per month, the business can include only $7,500 on the loan forgiveness application.

See also:

• AICPA Launches PPP Loan Forgiveness Tool
• Majority of Businesses Sought PPP Loans
• Combating CARES Act Fraud

Pay Close Attention as Rules Evolve

Guidance on PPP loan forgiveness has been spotty and sporadic, to say the least. Small businesses that are assuming they will qualify for loan forgiveness should carefully review their expenditures, especially if they’re dealing with the related-party rules.

Because the rules remain unclear in many areas, it’s important for these organizations to pay close attention for forthcoming guidance that could provide clarity or modifications to the existing rules.

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From: ThinkAdvisor