Paycheck Protection Program: Allocability of Nonpayroll Costs to Your Business

September 2, 2020  |  By: Keith A. Krauss, Esq.

The SBA, in consultation with the Treasury, released another set of interim final rules, dated August 27, 2020 regarding forgivable costs under the Paycheck Protection Program.

In these rules, the SBA discusses allocability of nonpayroll costs. Specifically, they make clear that only that portion of the rent and/or mortgage interest incurred and paid by the business which is directly allocable to the business is eligible for forgiveness. The SBA provides a couple of illustrative examples regarding allocability:

  • Example 1: A borrower rents an office building for $10,000 per month and subleases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.
  • Example 2: A borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value of the office building, then the borrower may only claim forgiveness on 75% of the mortgage interest.
  • Example 3: A borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.

The rules state that rent payments may be eligible for forgiveness, however, (a) (i) the amount request for rent must be no more than the amount of mortgage interest owed on the property during the covered period for space rented to the PPP borrower; and (ii) the lease was entered into before February 15, 2020; and further (b) please note that the SBA explicitly states in these rules that “[w]hile rent or lease payments to a related party, mortgage interest payments to a related party are not eligible for forgiveness.”

The rules also provide that an owner-employee with less than a 5% ownership stake in a C- or S- corporation are not subject to the owner-employee compensation rule – i.e. the cap on compensation for owner-employees fixed at $15,385 for businesses that received their PPP loans prior to June 5, 2020 and elected an 8-week loan forgiveness covered period, and $20,833 for businesses otherwise subject to a 24-week loan forgiveness covered period.

Please click here to see the full text of the latest interim rules.

For additional guidance on the Paycheck Protection Program, please contact firm Counsel Keith A. Krauss via email here, Associate Young-Ji Park via email here or call 973.535.4441.

Tags: Genova Burns LLCKeith A. KraussYoung-Ji ParkCOVID-19PPPSBAPaycheck Protection ProgramCoronavirus