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Related Party Rent and Leases PPP Forgiveness Treatment, Transportation Costs, and More

Posted by Carlin Culbertson on Aug 26, 2020 11:44:20 AM

Financial paper charts and graphs on the table-3The SBA and Treasury have been busy over the past month putting out updates.  Most of them haven’t been too impactful or were just clarification stating something that was already assumed.  However, on August 24th they issued an Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs which addressed related party rent and leases among other things (discussed below), and limits related party rent to the amount of mortgage interest owed on the property during the Covered Period, which is likely substantially less than the total rent payment.  See below (emphasis is ours).

The rule states the following:

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

Yes, as long as (1) 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 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. Any ownership in common between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments. While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness. 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. This will maintain equitable treatment between a business owner that holds property in a separate entity and one that holds the property in the same entity as its business operations.

Keep this in mind as you prepare to file.  You’ll be limited to the amount of mortgage interest on the property and need to substantiate that amount with documentation.

Also, in this rule it clarifies that an owner/employee and the limitations applied to them only apply to owner/employees that own 5% or more of the company.  This is important if your company is an ESOP or has a stock ownership plan as all your employees could have possibly been employee/owners, and this clarifies now that they are not.  However, if someone does own 5% or more, they would be considered an owner/employee and rules applying to that classification would apply.

The other portion mentions that if you sublease space in your building to a tenant, you can only claim forgiveness for your rent less the income you get from the sublease (or leases).  This makes sense but wasn’t specifically addressed before, but now it is clear.  Similar clarification exists for mortgage interest if you rent part of the building to another company, shared space (say an office space you share with another professional and you split the costs), etc.  Also, if you have a home-based business, household expenses cannot be included, only expenses that were deductible on the 2019 tax return for the home-based business.

Other items of note from updates issued August 11th are as follows:

  • Transportation Utility costs are clarified here on page 7.  It is a utility charge that not all states or localities have.  It is not fuel as some thought prior to the clarification.
  • Vision and dental benefits officially count as group health benefits as mentioned in FAQ item #51 which you can find here.

We will continue to monitor for updates and keep putting out blogs and other resources, especially if it could have a significant impact like the treatment of related party rent as mentioned above.  If you haven’t already, consider downloading our PPP resources to start to get an idea of how much forgiveness you might receive, how waiting a couple more weeks could get you full forgiveness, and also to get an idea of what documents and information you need to assemble and get ready to apply for forgiveness once your bank has their portal open.  As you work through it and have questions, please reach out so we can help clarify before you need to apply with your bank, so the process is as smooth as possible.  Good luck!

Topics: Tax Planning & Strategies, Small Business, Accounting & Auditing, Accounting and Tax Resource, COVID-19, Featured

Carlin Culbertson

Carlin Culbertson

With over 15 years in public accounting, Carlin has extensive auditing experience serving a wide variety of clients in various industries, including construction, manufacturing, mining, biotechnology and distribution.