TAX ALERT |
Authored by RSM US LLP
On Monday, Aug. 24, 2020, The Small Business Administration (SBA) released additional guidance related to forgivable amounts for owners and certain nonpayroll costs. Under this interim final rule, an owner-employee with less than a 5% ownership stake in a C- or S-corporation is not subject to the owner-employee compensation limitation. This interim final rule puts to rest the confusion generated by the lack of guidance to date on the definition of an owner-employee for the Paycheck Protection Program (PPP).
While the SBA Loan Forgiveness Frequently Asked Questions document provides guidance on health insurance costs for owners with at least a 2% interest in an S-corporation, it does not provide a threshold for other compensation related costs. Borrowers should take care in calculating eligible compensation for owner-employees, especially in S-corporations, as employees with less than a 5% ownership stake are not limited on compensation (aside from the $100,000 annualized compensation limit), but employer contributions for health insurance for employees with at least a 2% ownership is not allowed as a qualified forgiveness cost as those contributions are included in cash compensation. In effect, those employer contributions should not be counted twice for employees that have at least a 2% ownership stake in an S-corporation.
Secondly, guidance was issued for forgiveness eligibility for related party rent 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. Borrowers will be required to submit mortgage interest documentation to substantiate these payments. Borrowers must also be aware that for PPP purposes, any ownership in common between the business and the property owner creates a related party.
Finally, the SBA provides that no amount of loan forgiveness is provided for any amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower, or for the household expenses of a home-based business.
Overall, the clarifying guidance from the SBA is helpful to borrowers, although the rule that limits related party rents to the underlying mortgage interest amount may limit certain nonpayroll costs eligible for forgiveness. However, with the extension of the covered period to 24-weeks, most borrowers should be able to obtain full forgiveness, even with the limitation of related party rents.
This article was written by Rob Calafell, Justin Stallard, Ryan Corcoran , Debbie Singer and originally appeared on 2020-08-25.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
TJS Deemer Dana LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.