The Small Business Administration (SBA) recently issued an interim final rule clarifying the meaning of “owner-employee” for loan forgiveness purposes. The term was first used in a May interim final rule stating caps would be placed on compensation paid to owner-employees and still be forgiven. Paycheck Protection Program (PPP) loan borrowers were not initially offered a clear definition of “owner-employee” from the SBA, leaving many confused. Now, the guidance provides the clarity many were seeking, but it wasn’t the answer many were hoping for. With this new interim final rule, borrowers nationwide are left wondering if the government is updating the rules too late in the PPP game. Doeren Mayhew’s advisors explore the new interim final rule and how your business may be affected.

Owner-Employee Threshold

The interim final rule states that owner-employees of a C corporation or S corporation who have an ownership stake of less than 5% are not subject to the owner-employee compensation rules. Essentially, the intended exemption is to cover owner-employees who don’t have a say in deciding how loan proceeds are used.

On the PPP loan application and other SBA regulations, there was reference to 20% ownership of entities, leaving many assuming this would be the threshold determining ownership. Given the large difference, those who were anticipating 20% were unpleasantly surprised with the 5% from the latest rule. While 5% is considered low, the threshold is also an important distinction for some, since .10% owners would otherwise be treated the same as 100% owners under PPP regulations.

Rent Costs: Forgivable?

In addition to the new owner-employee guidance, the new interim final rule also discusses the forgiveness of rent, a nonpayroll cost. According to the new guidance, “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”, meaning that amounts paid by a sub-tenant would offset a borrower’s rent expense eligible for forgiveness.

Related Party Rental Payments

In an unfavorable item of guidance, the SBA states that the loan forgiveness requested for rent or lease payments to a related party can be no more than the amount of mortgage interest owed on the property during the borrower’s covered period and the mortgage interest must be allocated and attributed to the space being rented by the business. For PPP purposes, any ownership in common between the business and the property owner creates a related party. The new final rule seems to penalize building owners who have paid off their mortgages on their office space, as these (related party rental) payments cannot be forgiven.

If you have questions about this new interim final rule and how your business may be affected, contact Doeren Mayhew’s advisors today.