Interim Rule (Owner Comp Limitations and Rent)

By Bill Claffey, Esq., Partner, Tax Services
Aug 26, 2020

On August 24, 2020, the SBA issued Interim Rule on Business Loan Program Temporary Changes – Treatment of Owners and Forgiveness of Certain Nonpayroll Costs.  The new interim rule addresses the following issues:  1) owner compensation for S Corp and C Corp owners and 2) nonpayroll costs including rent, mortgage interest, other.   

Owner compensation limitations for S Corp and C Corp owners 

Pursuant to a June 26 Interim Rule issued by the SBA, ‘owner-employee’ compensation is generally limited to the lesser of 8/52 (15.38%) of 2019 compensation or $15,385 for PPP borrowers choosing the 8-week period or 2.5 months (20.83%) of 2019 compensation or $20,833 for PPP borrowers selecting a 24-week period.  The logic provided by the SBA in setting such limitations was to prevent windfalls that could inure to owners, especially with respect to PPP borrowers selecting a 24-week period.   

Pursuant to the August 24, 2020 Interim Rule, the SBA has determined that this limitation does NOT apply to S Corp or C Corp owner-employees with less than 5% ownership.   The logic presented by the SBA with lifting this limitation for such owners with less than 5% ownership, is that owners with less than 5% are generally not in a position to influence such compensation decisions and create windfalls for themselves.   

FML notes that the limitation on less than 5% owners applies only to S Corp and C Corp owners and not to Partnership, LLL members.  Accordingly, the owner compensation rules continue to apply to partner/LLC members with less than 5% ownership.  

Rent/Mortgage Interest 

Related Party Rent – Pursuant to the August 24, 2020 Interim Rule, rent paid by a Borrower to a related party is limited to the amount of the underlying mortgage interest paid by the related party during the Covered Period.  The SBA has states in this guidance that the purpose of the PPP program is to cover certain nonpayroll obligations owed to third parties, not payments to a business’s owners.    

This is a surprising shift in policy, whereby intercompany related party rent was deemed a forgivable cost in the past without such limitations. 

Sublease – PPP borrowers that sublease space must reduce rent eligible for forgiveness by the amount of rent collected during the covered period.  

Shared Space – PPP borrowers that share space with another tenant must prorate rent and utility payments in the same manner as prorated for tax return purposes.   

Mortgage Interest – PPP borrowers paying mortgage interest that are leasing out such space must reduce such mortgage interest amount from forgiveness for FMV of space that is leased out.  For example, if PPP Borrower pays $100 in mortgage interest and leases out 75% of such space, only $25 will be available for loan forgiveness.   

Household Expenses – PPP borrowers that work out of their home can include only those covered expenses that were deductible on the borrower’s 2019 tax returns or projected 2020 returns if a new business.   

Other Notes

Unfortunately, there remain a number of unanswered questions.  Specifically, FML notes the ambiguity regarding the option to choose covered periods between 8-weeks and 24 weeks.  While the revised Loan Forgiveness instructions clearly indicate this as an option, limited guidance has been issued on that front and FTE reports provided by some payroll providers don’t appear to accommodate a covered period of between 8-24 weeks.