This week, the SBA issued a new Interim Final Rule (IFR) on the Treatment of Owners and Certain Nonpayroll Costs that greatly impacts many PPP borrowers in the following ways:

Owner-employees with less than a five percent ownership stake in a C- or S- Corporation are NOT subject to the owner-employee compensation rule. This is the first time the SBA has provided a threshold of what qualifies someone as an owner-employee.

The earlier rule on owner-employee compensation (issued on June 19) caps the amount of loan forgiveness for payroll compensation to an owner-employee. Please New EZ and Revised PPP Forgiveness Application Released linked here for the details of these limitations.  

a. Amounts attributable to the business operations of a tenant or sub-tenant of a PPP borrower (or household expenses for home-based businesses) are NOT eligible for forgiveness. For example, if a borrower pays $10,000 of monthly rent and receives $2,500 of sub-rental income, only $7,500 is eligible for loan forgiveness. If this same borrower owned their real estate instead, and paid mortgage interest, only 75% of the mortgage interest would be eligible for forgiveness.

b. Rent paid to a related party is potentially limited. The amount of loan forgiveness requested for rent or lease payments made to a related party may not exceed the amount of mortgage interest “owed on the property”. This removes an advantage borrowers who owned their real estate in a related party may have had over borrowers who own their real estate in the same entity as the borrower.

We continue to monitor ongoing updates to the PPP Program. To better understand how the changes impact your unique situation, please contact your Rudler, PSC advisor at 859-331-1717.