Paycheck Protection Program: Treatment of Owner’s Compensation for Corporate Shareholders

Paycheck Protection Program: Treatment of Owner’s Compensation for Corporate Shareholders

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SBA PPP LOAN FORGIVENESS RULES

By Scott Zickefoose, CPA, CM&AA, Tax Senior Manager | Business Turnaround Services Team

Overview of Interim Final Rule on Treatment of Owner’s Compensation for C-Corporation and S-Corporation Shareholders

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is a 2.2 trillion dollar stimulus package that provided relief to small businesses and individuals. The Paycheck Protection Program (PPP) allocated funding to small businesses through new and enhanced loan programs administered by the Small Business Administration (SBA).

The SBA, in consultation with the Department of the Treasury, has been issuing periodic updates and changes on Frequently Asked Questions (FAQs) and Interim Final Rules. On August 24, 2020, Treasury published an Interim Final Rule addressing the treatment of owner’s compensation for C-Corporation and S-Corporation shareholders as well as a new analysis of permissible ‘nonpayroll costs’.

Owner-Employee Compensation for C- or S-Corporation Shareholders

Previously issued guidance has imposed several limitations on the inclusion of owner-employee compensation in a borrower’s forgiveness application. In its latest guidance, Treasury exempts owner-employees with less than a 5 percent ownership stake in a C- or S- Corporation from the owner-employee compensation limits. Treasury indicates that this exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated/used.

Related Party Rent Payments

In its most recent announcement, Treasury confirms that related party rent is eligible for loan forgiveness but imposes new tests for determining the permissible amount of rent to include in the forgiveness calculation. The amount of loan forgiveness requested for rent or lease payments to a related party can not be more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business and the lease and the mortgage must have been entered into prior to February 15, 2020. Any ownership in common between the business and the property owner is a related party for these purposes (no materiality threshold). In order to claim rent expense paid to a related party, the borrower must now submit to the lender documentation to substantiate the amount of mortgage interest incurred during the Covered Period.

Paycheck Protection Program Guidance on Other Nonpayroll Costs

Treasury also released guidance that excludes expenses incurred in connection with operations of tenants or sub-tenants of the PPP borrower.  The Interim Final Rule confirms that borrowers may only include expenses for which they bear the economic burden. In the example provided, a borrower rents space for $10,000 per month and sublets a portion of the space for $2,500 per month. In this example, only 7,500 dollars per month is eligible for loan forgiveness. Treasury provides other examples of how to properly include/exclude costs in shared spaces. You can read more about these examples here.

Our advisors are closely monitoring updates and changes to PPP guidance as well as the business impacts related to COVID-19. We are here to provide valuable resources as well as sound advice and strategies to move your business forward through this economic downturn.

If you have any questions, please contact your Keiter Representative or Keiter Advisors. We are here to listen and provide sound advice.

ADDITIONAL RESOURCES FOR PPP LOAN RECIPIENTS

COVID-19 Business Resource Library


About the Author

Scott Zickefoose works with both large and mid-market clients in the real estate, construction, and manufacturing industries, as well as with private equity firms and emerging businesses. He works closely with his clients to identify tax planning and savings opportunities.  His experience includes single and multi-state corporate and flow-through tax planning and compliance, corporate tax provisions (FAS 109 and FIN 48), and individual income taxation. Scott is a member of the Keiter Merger and Acquisition team and Future Leaders group.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

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