By Gina Brymer, CPA – Senior Manager and Laurie Kaplan, CPA – Partner
September 1, 2020
On August 24, 2020, the Small Business Administration (SBA) issued an interim final rule that provides additional guidance on treatment of owners and forgiveness of certain nonpayroll costs.
Below are the key points.
- Owner-employees with less than a 5% ownership in a C or S Corporation are not subject to the owner-employee compensation rule, which means there is no special cap on the amount of loan forgiveness for payroll compensation.
- Loan forgiveness for nonpayroll costs do not include rent or mortgage interest attributable to the operation of tenants or sub-tenants.
- There is a new limitation on the forgiveness of rent payments to a related party (defined as any ownership in common). Prior to the interim guidance, it appeared that rent payments to a related party were eligible for forgiveness if there was a lease in place prior to February 15, 2020. However, the interim final rule states that rent payments to a related party are eligible for loan forgiveness if:
- The amount of forgiveness does not exceed the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business.
- The forgiveness only applies to rent or lease payments and not mortgage interest between related parties.
- The lease and the mortgage were both entered into prior to February 15, 2020.
- What does this mean? If you have a business that is renting space from a related party, the forgiveness allowed is limited to the amount of mortgage interest paid to an outside party. If there is no mortgage on the property, no forgiveness for the rent will be allowed.
- If rent is being paid to a related party and limiting your loan forgiveness, a 24-week covered period is recommended over an 8-week covered period so most of the loan can be used for payroll costs.
We will continue to closely monitor any new developments and keep you informed. If you have any questions, please contact your MichaelSilver tax professionals at 847.982.0333.