August 26, 2020

New PPP Interim Final Rule Addresses Loan Forgiveness Requirements

Provisions Added Regarding Treatment of Owner-Employees and Limitations on Eligibility of Non-Payroll Costs
Holland & Knight Alert
David A. Surbeck | David Matuszewski


  • A new Interim Final Rule (IFR) from the U.S. Small Business Administration (SBA) provides that certain owner-employees with less than a 5 percent ownership stake are not subject to the owner-employee compensation rule of the Paycheck Protection Program (PPP) limiting loan forgiveness for owner compensation.
  • The IFR also provides that loan forgiveness may not include 1) amounts attributable to tenant, subtenant or household expenses, 2) most rent payments to a related party or 3) mortgage interest payments to a related party.

The U.S. Small Business Administration (SBA) published a new Interim Final Rule (IFR) on Aug. 24, 2020, related to the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The IFR addresses a) treatment of certain owner-employees and b) limitations on eligibility of certain non-payroll costs for loan forgiveness.

Owner-Employee Compensation Rules Inapplicable to Certain Owners

The First Loan Forgiveness Rule, as revised by the Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, 85 FR 38304, 38307 (June 26, 2020), capped the amount of loan forgiveness for payroll compensation attributable to an owner-employee to either eight weeks' worth (8/52) of their 2019 compensation (up to $15,385) for an eight-week covered period or 2.5 months' worth (2.5/12) of their 2019 compensation (up to $20,833) for a 24-week covered period per owner in total across all businesses. There was no exception in the rule based on the owner-employee's percentage of ownership.

The new IFR provides that an owner-employee in a C- or S-corporation who has less than a 5 percent ownership stake will not be subject to the owner-employee compensation rule. The IFR describes the exemption as intending to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated. It should be noted that the IFR applies this exception only to corporate entities and does not provide an exception for partnerships or limited liability companies.

Eligibility of Certain Non-Payroll Costs for Loan Forgiveness

Shared Rent, Mortgage Interest and Utility Costs

Although a borrower might expect to capture all rent, mortgage interest or utility expenses when calculating its forgiveness amount, it must be careful to take into the account the portion of such expenses that are attributable to a tenant or subtenant or to household expense for a home-based business. The IFR provides four examples that make clear that 1) rent paid to the borrower from a subtenant reduces the eligible rent expense, 2) mortgage interest for a mortgage that covers property subject to a lease to a third party must be reduced pro rata by the percentage (by fair market value) of the property which is leased out, 3) for shared spaces, utility payments must be similarly allocated, and 4) home office expenses are limited to proration as set forth on 2019 taxes (or as expected for 2020 taxes if a new business). Though not included in the examples, borrowers who lease out a portion of a personal property asset to which rent, mortgage interest or utilities are attributable should consider a similar treatment for any such asset.

Related Party Rent and Mortgage Interest

While many borrowers operate on real estate leased to the borrower by a company owned by a related party, until now the SBA's guidance did not provide any express restrictions on the use of rent expense under related party leases as a forgivable use of loan proceeds. The IFR places a new cap on loan forgiveness available for rent paid to related parties to no more that the amount of mortgage interest owed on the property during the covered period in question that is attributable to the space being rented by the business, and only to the extent that both the lease and the mortgage were in place prior to Feb. 15, 2020, on the theory that if the property was held directly by the borrower, the borrower would only be entitled to obtain forgiveness for this amount of mortgage interest. As a further note, the IFR provides that any mortgage interest owed to a related party is not eligible for forgiveness. 

As a further reminder, the PPP allows for forgiveness for rent and mortgage interest for both real and personal property (i.e., items such as vehicles, copiers or servers). Although the IFR used only real property examples, there is no reason to assume that these limitations would not apply equally to any rent or mortgage interest with respect to personal property.

The term "related party" is not addressed in the statutory language of the CARES Act or previously in prior rules and is thus described in the IFR as including "any ownership in common between the business and the property owner." Interestingly, although appearing in the same IFR, the SBA did not elect to exclude owners of less than 5 percent as was done for the owner-employee compensation rule describe above. As a result, the safest approach seems to be to treat any level of co-ownership as creating a related party relationship no matter the size of the interest or the indirect nature of ownership.

Furthermore, if applying for forgiveness for related party rent, the borrower is required to provide its lender with mortgage documentation to substantiate the related payment, something lenders will now need to be prepared to accept into any portal system intended to accept forgiveness applications.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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