paycheck protection program loan forgiveness

Small businesses that applied for the Paycheck Protection Program, as of August 10th, can begin submitting requests for loan forgiveness. However, the SBA has continued to tweak the rules for how businesses can use forgivable funds, which has complicated the process for many small business owners. A recent ruling, published in August, introduced new rules for how funds can apply to rent, mortgage interest, and utility bills. Also covered in the ruling are business owners with a less than 5% stake in the company.

In general, PPP loans are forgivable if your business used 60% of the funds to cover payroll costs during the covered period (either 8 or 24 weeks from the date you received the funds). The remaining 40% could be used for mortgage interest, business rent, and utilities, provided they were in place on February 15, 2020. The SBA hadn’t previously made any further restrictions on the items in the 40% category, but the new rules aim to curtail forgiveness on payments made to related parties.

Here are some examples of situations where the new rule may come into play:

  1. If you rent a portion of your office space to another business, you will not receive forgiveness for the portion of the rent payment your tenant covers. Say you have a tenant whose rent covers one-third of your monthly rent or mortgage payment. You are only eligible to request forgiveness on the two-thirds of the payment you cover. If you lease space to a tenant for under fair market value, the fair market value will be used to calculate your forgiveness amount.
  2. Same goes for utility bills. If another business is contributing toward the building’s utility costs, you can only seek forgiveness on the amount your business is paying—not the full amount.
  3. Home office expenses are forgivable based on the prorated amount you claimed as a deduction on your 2019 taxes or the amount you expect to claim on your 2020 return.
  4. If your business owns the building, but also pays rent, you may not receive forgiveness. This mostly pertains to multi-generational businesses. Imagine Business A holds an ownership interest in Business B, which owns the building. Businesses A and B are considered related parties. Business A is eligible for forgiveness on the portion of rent or lease payments to Business B, but that amount must be equal to or less than the amount of mortgage interest Business B pays. If Business B owns the building outright, without a mortgage, Business A is not eligible for forgiveness on those payments.
  5. These new guidelines may enable some businesses to receive more forgiveness than expected. 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. Previously, this rule stated that anyone with a stake in a company 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 chose to the 8-week covered period option. Under these new guidelines, anyone who owns under 5% of a company is eligible for more salary forgiveness—up to $46,154 per individual over the 24 week period. Covered benefits—such as health care expenses, retirement contributions and state taxes—are also eligible for forgiveness.

Are you ready to submit your PPP forgiveness application? If you’ve used the funds, we recommend submitting your application when you can. Do you need help understanding your eligibility for Paycheck Protection Program loan forgiveness? Schedule a consultation with our team.