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Type: Law Bulletins
Date: 08/25/2020

SBA Part Twenty-Five: Thumbs Up, Thumbs Down – SBA Releases Revised Owner-Employee Compensation Rule and New Related Entity Rent Rule

On Aug. 24, a new interim final rule (IFR) was released regarding the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) under the CARES Act focusing on the compensation treatment of owner-employees and forgiveness of certain non-payroll costs.

The new IFR states owner-employees that own less than a 5 percent interest in a C or S corporation are no longer subject to the previously established owner-employee compensation rule that capped owner-employees at $20,833 under the 24-week covered period option. Hence, owner-employees for C or S corporations with a 5 percent or less interest in the corporation are now able to earn up to $46,154 in PPP funds during the 24-week covered period. The eight-week covered period has no differentiation between owner-employees and employees regarding a compensation cap of $15,385.

In our opinion (and perhaps many others), a big change that is simply too late to be implemented and should be retracted is the SBA’s new rule regarding rental payments between related entities. Under this IFR, the SBA now states if a landlord is a related party to the borrower (tenant) that the portion of forgivable PPP funds related to rent is limited to the interest owed on the mortgage for that property. Furthermore, the percentage of the interest that may be eligible for forgiveness is also affected by the SBA’s determination that rents paid for portions of the building not inhabited by the borrower must be deducted. Within the IFR, example number two provides that “[t]he portion of mortgage interest that is eligible for loan forgiveness is limited to the percent of the fair market value of the space that is not leased out to other businesses.” It would also seem by the reading of this new rule that if the landlord owns the property outright, no rent is deductible.

It is our belief that this change will cause many unneeded ripple effects and changes in submitted loan forgiveness applications or applications waiting to be submitted as soon as some unopened bank portals open. Taft will continue to monitor this and provide any updates. Individuals can also reach out to congressional officials so they can add to the chorus of individuals expressing dissatisfaction with this rule so that this new provision will be amended and, or retracted in the future.

For further information, please contact any member of Taft’s SBA Task Force.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

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