PPP Loan Modifications

Posted on Wednesday, August 26, 2020

On August 24, 2020, the Small Business Administration (SBA) issued yet another Interim Final Rule (IFR) for the Paycheck Protection Program.  This latest IFR, Treatment of Owners and Forgiveness of Certain Nonpayroll Costs, is particularly interesting due to the timing of the release of this guidance.  Some of the changes noted in this IFR can have a substantial impact on the amount of loan forgiveness for some borrowers.  With some lenders starting to accept loan forgiveness applications, the SBA is causing a lot of stress for some borrowers that will now have to modify their loan forgiveness applications and supporting documentation for these changes. 

Here are some of the key items from this latest guidance: 

Owner-Employee Compensation 

Previous guidance issued by the SBA had no exception in the rule based on the owner-employee’s percentage of ownership.  Essentially, if you had any ownership stake, you were considered an owner-employee.  The SBA has now determined that an owner-employee in a C or S Corporation who has less than 5% ownership stake will not be subject to the owner-compensation rule.  This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.  It is interesting to note that this guidance only covers C and S Corporations.  It appears that partnerships are not allowed to utilize this exemption.  

Amounts Attributable to the Business Operation of a Tenant or Sub-tenant 

The SBA has determined that the amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower.  As an example, if a borrower rents an office building for $10,000 per month and sub-leases out a portion of the space to other businesses for $2,500 per month, then only $7,500 per month is eligible for loan forgiveness.  A borrower would also have to take into account prorating any mortgage interest and utility payments that may be associated with a tenant or sub-tenant. 

Rent Payments to Related Party 

This latest IFR addresses a question that has gone unanswered for quite some time.  With no previous guidance, borrowers were under the impression that rent payments to a related party would be eligible for loan forgiveness since there was no guidance to the contrary.  The SBA has addressed this issue now and is noting that the amount of loan forgiveness requested for rent or lease payments is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business.  As example, if a business rents a facility from a related party for $10,000 per month but the related party does not have a mortgage on the facility, then the $10,000 rent payment per month would not be eligible for loan forgiveness.  Alternatively, if the related party does have a mortgage on the facility but the mortgage interest is only $3,000 per month, then the borrower will have its allowable rent payment reduced to $3,000 per month. 

Contributed By: Zach Richards, CPA, CFE | Director | DWD CPAs & Advisors

Posted in Tax And Accounting Topics For Business

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