Apple Growth Partners

SBA issues Interim Final Rule (IFR) relating to less than 5% owners, rent paid to related parties and certain nonpayroll costs.

August 24, 2020

Owner-employees with < 5% interest

Owner-employees of an S or C corporation with less than a 5% interest are not subject to the owner-employee compensation rule.

Eligibility of amounts attributable to business operation of tenant or sub-tenant or household expenses eligible for forgiveness?

No. Nonpayroll costs may not include any amounts attributable to the business operations of a tenant, or sub-tenant or household expenses if a home- based business.

Examples –

  • PPP borrower rents space for $10,000 per month but receives $2,500 in sub-lease income. Only $7,500 is eligible for forgiveness.
  • PPP borrower has mortgage on its office building and leases 25% of the space to another business. Only 75% of the mortgage interest is eligible for forgiveness.
  • PPP borrower shares space with another business. Borrower must prorate the rent and utilities in the same manner as the tax filings.
  • PPP borrower works out of his or her home. Borrower may include only the share of covered expenses that were deductible of the 2019 tax filings.

Are rent payments to a related party eligible for loan forgiveness?

Yes, but on two conditions:

  • Loan forgiveness requested for rent or lease paid to related party cannot be more than the amount of mortgage interest owed on the property during the Covered Period.
  • Lease and mortgage must have been entered into prior to February 15, 2020.

Key definition – Any ownership in common between the business and the property owner is a related party for these purposes.

Documentation required – Borrower must provide lender with mortgage interest documentation.

  • Mortgage interest payments to a related party are not eligible for forgiveness.

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