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PPP Loans – Updated Guidance

30 September 2020

It’s time for a new Paycheck Protection Program update courtesy of the SBA.

On August 24, 2020, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury issued a new interim final rule pertaining to owner-employee compensation and the eligibility of non-payroll expenses.

The new guidelines state that an owner-employee in a C- or S-corporation who has less than a 5% ownership stake will not be subject to the owner-employee compensation rule, which caps the amount of loan forgiveness on owner-employee compensation.

Prior to the change, the owner-employee compensation rule stated that anyone with a stake in a company—no matter how small—that took out a PPP loan was eligible for forgiveness of the lesser of $20,833 or 20.833% of their 2019 compensation or $15,385 or 15.385% if the borrower elected to use an eight-week covered period.

The updated guidance means that if you have an equity stake under 5% in your company, you are now eligible for more salary forgiveness—up to $46,154 per individual over 24 weeks. In addition, covered benefits like health care expenses, retirement contributions and state taxes imposed on employee payroll and paid by the employer would also be eligible for forgiveness.

With respect to non-payroll costs, and their eligibility for coverage under the PPP, the SBA and Treasury have made two decisions, promulgated in this new interim final rule (does anyone beside myself think “interim final rule” sounds funny at this point?).

Decision #1:

Non-payroll costs may not include any expenses attributable to the business of a tenant or sub-tenant of the borrower. The new guidance illustrates this with four different examples:

  1. If a borrower had rented space for $10,000 per month, and sub-leases some of the space for $2,500 per month, only $7,500 per month is eligible for forgiveness.
  2. Similarly, if a borrower has purchased a building, which now carries a mortgage, and rents some of the space to a tenant, the mortgage interest is only deductible to the extent of the percentage of fair market value (FMV) attributable to the non-rented-out space. E.g., if the leased-out space represents 35% of the FMV, then only 65% of mortgage interest is eligible for forgiveness.
  3. If two or more businesses have conjoined to be tenants in common in a shared space, a borrower must pro-rate rent and utilities in the same manner as was done on the 2019 tax filings, or as is expected to be done on 2020 tax filings, if this is the business’ first year of operation, to determine eligible forgiveness amounts.
  4. For those working out of a home office: in determining non-payroll cost eligibility, as above, only the portion of covered expenses deducted on 2019 tax filings, or expected to be deducted in 2020, if this is the first year the business is in operation, is eligible for forgiveness.

Note that, to be eligible as a PPP-covered expense, lease, rental, or mortgage payments must be incurred under a lease or mortgage entered into prior to February 15, 2020.

Decision #2

This decision pertains to “relative-party” lease or rental payments and mortgage interest payments:

  1. The new interim final rule provides that lease or rental payments to a related party are eligible for PPP loan forgiveness, as long as 1) the amount of loan forgiveness does not exceed the portion of the mortgage interest paid by the related party for that portion of the mortgaged space which is rented by the business, and 2) both the mortgage and the lease in question were entered into prior to February 15, 2020.
  2. Mortgage interest payments made directly to a related-party are not eligible for forgiveness. The SBA and Treasury clarify in this decision that the purpose of PPP loans is to help businesses meet non-payroll obligations to third parties, not payments made to a business owner because of the business’s structure.


Two proposals which would impact PPP loan forgiveness, and the application process, are being considered in Congress:

  1. Most PPP loans issued were in amounts less than $150,000. Congress is considering blanket forgiveness for loans under that threshold, which threshold could itself change as the process moves forward.
  2. Per Notice 2020-32, the IRS has determined that, while the forgiven proceeds of a PPP loan will not count as taxable income, the forgiven eligible expenses are not tax deductible. A number of Congress members are unhappy with that determination, and are considering legislation to explicitly render such expenses fully deductible.

In our considered opinion, since the deadline to apply for PPP loan forgiveness extends 10 months from the end of the 24-week covered period, which for many borrowers has not yet concluded, it makes little sense to rush to apply for that forgiveness according to guidance which may well prove obsolete before year-end.

As has been said, the only certain thing about the PPP, since its enactment, has been the uncertainty surrounding its provisions.

Stay tuned – more PPP updates will be coming – that’s one thing we can be certain of.

If you have questions on the PPP, please click here to email us directly – we are here to help.

Until next Wednesday –



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