New PPP guidance addresses owner-employee compensation, nonpayroll costs

The Small Business Administration (SBA) released an interim final rule covering Paycheck Protection Program (PPP) loan forgiveness attributable to owner-employee compensation and certain nonpayroll costs. Specifically, the guidance provides a 5% threshold for determining C and S corporation employee ownership and adds potentially significant limitations on amounts eligible for forgiveness relating to rent and lease arrangements.

Key takeaways

C and S corporation owner-employees

Compensation paid to employees with less than a 5% ownership stake in a C or S corporation will not be subject to the more stringent forgiveness limitations. Since Congress did not intend windfalls to owners applying for PPP loans, previous guidance placed additional limits on business owner pay. The SBA explains this new 5% exception is to prevent the more strict limitations from applying to compensation of “owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.”

Whether this exception also applies to noncash compensation paid to such owner-employees is unknown. Pursuant to a previous interim rule, payments for noncash compensation are not forgivable if included in the owner-employee’s wages (as a matter of general tax principles). For example, health insurance premiums paid on behalf of an S corporation employee would be included in their wages if their ownership stake in the business was greater than 2% and, thus, these premiums would not be eligible for forgiveness. We expect further guidance to explain whether the exception applies solely to cash compensation.

Nonpayroll costs attributable to borrower’s tenant or subtenant not forgivable

PPP loan forgiveness applications cannot include costs attributable to tenants or subtenants of the borrower. To illustrate, the rule uses an example: a PPP borrower rents office space for $10,000 per month and subleases a portion to another business for $2,500 per month. In this instance, forgiveness for the borrower’s rent expense is limited to $7,500. This limitation would also apply to any mortgage interest or utilities expense attributable to the subtenant. Finally, loan forgiveness may not include household expenses associated with home-based businesses.

Rent and mortgage interest payments to a related party