🔒The latest rules on PPP loan forgiveness

Many recipients of federal Paycheck Protection Program loan proceeds are now beginning the process of applying for loan forgiveness. The U.S. Small Business Administration recently issued additional guidance on PPP loan forgiveness. There are some key takeaways proving helpful with regard to owner-employees, eligibility of certain rental and mortgage interest payments, and related-party rent.

For starters, the SBA offered clarification regarding exceptions as owner-employees. Individuals with a less than 5%ownership stake in a PPP borrower that is a C- or S-Corporation are not subject to the owner-employee compensation rule when determining the amount of their compensation eligible for loan forgiveness.

The SBA clarified amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower are not eligible for forgiveness. Specifically, when a portion of a rented office building is leased to other businesses, only the amount of the lease minus the rent from the sublease is eligible for loan forgiveness. Similarly, if a borrower has a mortgage on an office building it operates out of, and leases out a portion of the space to other businesses, the portion of mortgage interest eligible for loan forgiveness is limited to the percent share of the fair market value of the space not leased out to other businesses.

The SBA addressed related-party rentals, capping eligible expenses based on only the mortgage interest owed on the property during the covered period. As long as the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the covered period, and the lease and the mortgage were entered into prior to Feb. 15, rent payments to a related party are eligible for loan forgiveness.

Still, there is a lack of clarity around the issue of deductibility of expenses reimbursed with the proceeds of a PPP loan. In April, the IRS said expenses reimbursed by a forgiven PPP loan will not be allowed as a tax deduction. This, in effect, would increase the taxable income of an eligible borrower with a PPP loan forgiven by the amount of the loan that is forgiven.

This decision has been heavily criticized by tax professionals and lawmakers because the position taken appears to ignore the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients.

On May 5, in a show of strong bipartisan support, Sen. Chuck Grassley (R-Iowa) and Congressman Richard Neal (D-MA) issued a strongly worded letter to U.S. Treasury Secretary Steven Mnuchin expressing the intent of Congress in drafting the CARES Act and the inappropriateness of the IRS position.

Following the release of that letter, a bipartisan group of senators introduced the Small Business Expense Protection Act to directly overturn the IRS position. While it has been reported the bill has strong bipartisan Congressional support, it has yet to be voted on as a stand-alone bill. However, most professionals and lawmakers are expressing optimism in its ultimate passage as part of a future relief package.

Affected taxpayers may want to delay filing 2020 tax returns until the extended due date while we await additional guidance/legislative action, ensuring PPP loan proceeds remain as helpful as intended.