The SBA and The Treasury Department issued additional guidance last Monday on a few of the remaining issues for PPP Loan Forgiveness. The issues relate to owner-employee compensation and the eligibility of non-payroll costs to be included in the forgiveness formula.
This new interim rule states that owner-employees with a less than 5% stake in their C or S Corporations are exempt from the PPP Owner-Employee Compensation Rule when it comes to the amount of their compensation eligible for loan forgiveness. The reason behind this interim ruling is that these owner-employees have no meaningful decision making ability when it comes to how the PPP Loan Proceeds were spent. As such, they are now no longer subject to the Owner-Employee Compensation Rule.
Further, the guidance also provides clarity on the treatment of rents and mortgages. Specifically it states that any costs attributable to the business operations of a tenant or subtenant of the borrower cannot be included for forgiveness purposes. Let’s go through a few examples.
1 – The borrower rents a space for $5,000 per month and has a subtenant that pays $1,500 monthly. As such, only $3,500 is eligible for loan forgiveness.
2 – The borrower owns a property that it uses for its business and rents out a portion of the building to a tenant. The portion of the mortgage that is eligible for forgiveness is the fair market value of the space that is not leased out to other businesses.
Notice how I said the fair market value. If you are charging yourself a rent which is not FMV, then the difference between what you pay on the mortgage, and what you receive from the tenant, is irrelevant. Forgiveness must be based upon a Fair Market Value Assessment.
3 – The borrower works out of their home. When determining an amount for non-payroll items, any rent or utilities can only be based upon an amount that was deducted on their 2019 income tax return.
If you did not deduct anything for rent or utilities on your 2019 return, then no amount is allowable for forgiveness inside the covered period. If you deducted $5,000 for rent and utilities on your 2019 return and you are using an 8 week covered period then you would use the following formula. Take $5,000, divide by 52 weeks, and then multiply by 8 weeks to get an amount of $769.23 which is includable for forgiveness purposes.
Let me leave you with this one thought…
We have submitted four of these forgiveness applications so far. Two went smoothly. The other two did not.
On one where there were problems, the reviewer requested additional information. We had this information, but the client was unable to submit it because the forgiveness process was an electronic one where you could only submit a finite amount of evidence. Now that the additional information has been submitted, we expect it to go smoothly.
The last one was a simple case where the person reviewing the data did not understand the law as well as we do. It went like many audits do, where you are dealing with a person who just doesn’t know what they are doing. We have since provided the reviewer with additional information regarding the law. This one is expected to go through properly as well.
What I am trying to tell you is that this isn’t a cake walk. I had every reason to expect that it wouldn’t be, and it certainly isn’t. Don’t make the mistake of thinking that you can put anything you want on Form 3508, and that the reviewer will just take it as the Gospel Truth. Be ready to substantiate your numbers.
If you are having any problems with this process, we can help. Please go to the following web address, fill out the agreement, and submit your evidence.
We would love to help.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. If there is anything that you need, whether you are a current client or not, you have but to ask. I’m here and I remain,
Accounting Solutions Ltd.
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