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Publications | August 26, 2020
2 minute read

SBA Issues Interim Final Rule Implementing Flexibility Act Changes to PPP Loan Forgiveness Rules

On Monday, August 24, 2020, the Small Business Administration (SBA) and Department of Treasury issued a new Interim Final Rule (IFR) addressing Paycheck Protection Program (PPP) loan forgiveness issues related to owner-employee compensation and forgiveness of certain nonpayroll costs.

The IFR clarifies that employees who own less than a 5% interest in a C or S corporation are exempt from the PPP owner-employee compensation limitation rule when calculating the amount of their compensation eligible for loan forgiveness. This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
The IFR also addresses loan forgiveness eligibility of rent payments made to a related party of the PPP borrower. The PPP borrower and its landlord are related parties if they have any ownership in common. Rent payments to a related party are eligible for forgiveness if:

  1. The amount of loan forgiveness requested for rent or lease payments is no 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
  2. The lease and the mortgage were entered into prior to February 15, 2020.

The SBA justified this limitation on the basis that “PPP loans are intended to help businesses cover certain nonpayroll obligations that are owed to third parties, not payments to a business’s owner that occur because of how the business is structured.” Based on this limitation, if a borrower’s related-party landlord does not owe any mortgage interest on the property, the borrower cannot include rent payments on its PPP loan forgiveness application.
The rules surrounding PPP loans are complex and business specific. If you have concerns about the rules, please contact Ford TurrellTimothy HillegondsRob DaviesMatthew CroweCharlie GoodeJeffrey Ott or your Warner attorney.