Kranz receives updates on the CARES Act and how businesses are responding to impacts of the coronavirus through communications with our consultants, valued clients, partner firms, and legal and tax service providers. In our commitment to keeping you informed, we hope that our sharing this information regularly is of value to you.
CARES Act – What Just Happened? Week of August 24, 2020
New Interim Final Rule on Forgiveness of Certain Non-Payroll Costs
On August 24 the Treasury released IFR 24 providing supplemental information and guidance concerning the ownership percentage that triggers the applicability of the owner compensation rule for forgiveness purposes and limitations on the eligibility of certain non-payroll costs for forgiveness. Answers with examples were provided to three specific questions
Q: Are any individuals with an ownership stake in a PPP borrower exempt from application of the PPP owner-employee compensation rule when determining the amount of their compensation that is eligible for loan forgiveness?
A: Yes, owner-employees with less than a 5 percent ownership stake in a C- or S- Corporation are not subject to the owner-employee compensation rule. The First Loan Forgiveness Rule, as revised by the Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules, 85 FR 38304, 38307 (June 26, 2020), caps the amount of loan forgiveness for payroll compensation attributable to an owner-employee. There is no exception in the rule based on the owner-employee’s percentage of ownership. The Administrator, in consultation with the Secretary, has now determined that an owner-employee in a C- or S-Corporation who has less than a 5 percent ownership stake will not be subject to the owner-employee compensation rule. This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
Q: Are amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, in the context of home-based businesses, household expenses, eligible for forgiveness?
AL No, the amount of loan forgiveness requested for non-payroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses. The examples below illustrate this rule.
- Example 1: A borrower rents an office building for $10,000 per month and sub-leases 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.
- Example 4: A borrower works out of his or her home. When determining the amount of non-payroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.
Q: Are rent payments to a related party eligible for loan forgiveness?
A: 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 non-payroll 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.
Lender Administration of PPP Forgiveness Applications
On August 10 the SBA launched its web portal for PPP lenders to submit their decisions regarding borrower loan forgiveness applications. Borrowers may submit their loan forgiveness application to the lender once their loan covered period has ended (or prior to that if all loan funds have been expended) and must submit the application prior to ten months after the end of the covered period. However, very few, if any, lenders have chosen to even begin accepting forgiveness applications from borrowers. Affecting their decision to do so is the prospect that Congress will be simplifying the forgiveness process including granting automatic forgiveness to borrowers with loan amounts less than $150,000. Many lenders are also still in the process of developing internal processes and sufficient staff levels to enable them to process loans efficiently. Here is the current application processing status for the fifteen lenders with the highest dollar value of loans as shown below.
- JP Morgan Chase Bank – Not accepting applications and referring borrowers to their “Requesting Forgiveness through Chase” video which covers timelines, definitions, eligible costs, and documentation requirements.
- Bank of America – Not accepting applications and will advise borrowers when their application portal becomes available although no estimate of that date is provided.
- PNC Bank – Not accepting applications as they continue to develop their digital PPP Forgiveness Application which is expected to launch in late August.
- Trust Bank – Not accepting applications until at least September 8
- Wells Fargo Bank – Not accepting applications as they continue to develop their digital PPP Forgiveness Application although no estimate of that date is provided
- TD Bank – Not accepting applications as they await new guidance from the SBA and build their digital PPP Forgiveness Application
- KeyBank – Website provides no information on the status of their application acceptance process or timeline.
- S. Bank – Not accepting applications. Directs borrowers to use their online application portal expected to be available within the next several weeks
- Zions Bank – Accepting forgiveness applications through their online portal which opened in July
- M&T Bank – Not accepting applications as they await new guidance from the SBA and updating their application portal
- Huntington Bank – Not accepting applications until at least September as they await SBA guidance
- Cross River Bank – Uses loan service provider, Scratch, to accept and process applications. Scratch online portal not yet available.
- Fifth Third Bank – Website provides no information on the status of their application acceptance process or timeline.
- Citizens Bank – Online application portal accepting applications.
- BMO Harris Bank – Not accepting applications as they await new guidance from the SBA and updating their application portal
PPP Loan Update
- Through August 8 a total of 5,212,128 loans have been made (an increase of 128,543 in the last two weeks) totaling $525.0B, an increase of $3.6B since July 31.
- The average loan amount has dropped an additional $1,900 and now stands at $100,700.
- California small businesses have received 623,360 loans, an increase of 14,390 and 2.4% in the last two weeks. California’s loans as a percent of total loans has remained constant at 12.0%. Their $68.6B of loan value continues to be 13.1% of the total.
- Loans less than $150,000 represent 87.4% of all loans made and 28.2% of total dollars loaned.
- Loans between $350K and $1M account for 3.8% of loans made and 21.6% of total dollars loaned.
- 68.6% of loans made were for no more than $50,000.
- The following three industry sectors received the greatest share of loan funds – health care and social assistance (12.9%), technical and professional services (12.7%), and construction (12.4%).
- $134B of approved PPP funding remains.
- For additional detail on PPP loans by amount, state, lender size and activity click here.
PPP FAQ Update: New Question Added
The latest FAQ update was the addition of two Questions and Answers, #50 and #51 added August 11 by the Treasury at PPP Program FAQ’s.
- Q: What effect does the payment or non-payment of fees of an agent or other third party have on SBA’s guarantee of a PPP loan or SBA’s payment of fees to lenders?
- A: The payment or non-payment of fees of an agent or other third party is not material to SBA’s guarantee of a PPP loan or of SBA’s payment of fees to lenders.
- Q: Do payments required for the provision of group health care benefits, including insurance premiums, include vision and dental benefits.
- A: Yes
Aside from this blog we recommend the following websites for additional information and guidance:
National Venture Capital Associations (www.nvca.org)
U.S. Treasury (www.treasury.gov)
Small Business Administration: www.sba.gov
Live Update from Pitchbook on COVID-19 Impacts to PE/VC www.pitchbook.com