On Monday, Treasury and the SBA issued another Interim Final Rule.
The Good News
Owner-employees are treated less favorably than other employees when calculating potential loan forgiveness. For instance, in a 24-week covered period, a maximum of $20,833 in cash compensation may be included in payroll costs for an owner-employee. For a non-owner, the amount is $46,154. In the case of corporate owner-employees, the latest IFR only applies this limitation to owners of 5% or more. Unfortunately, no guidance is given for partners and members.
The Bad News
Treasury and the SBA have decided to limit the forgiveness of self-charged rent. The forgivable rent amount is limited to the mortgage interest paid on the business property. The IFR applies this limitation when there is any common ownership between the business and its landlord. And, unlike other non-payroll costs, it appears that the mortgage interest is limited to smaller of the amount accrued during the covered period or the amount paid during the covered period.
Oh, What a Surprise. Not!
In addition to this self-charged rent limitation, this IFR also announces a complete prohibition on self-charged interest.
Treasury and the SBA attempt to justify both of these self-charged rules by demanding equitable treatment regardless of how a business holds property or is structured. In our view, Treasury and the SBA have missed the mark. Not only do they start with the least defensible business structure for legal and tax purposes, they fail to consider the business’s capital structure. These two rules have the effect of rewarding bad and risky business decisions. Well capitalized, well structured businesses will potentially receive less loan forgiveness than their undercapitalized and poorly organized competitors.
Luckily, the extension of the covered period to 24 weeks by Congress will mitigate these negative effects. But it is unfortunately clear that after many weeks of pro-borrower guidance, the pendulum has started to swing the other way.
We do not expect this to be the last IFR issued by Treasury and the SBA. In addition, Congress failed to act on loan forgiveness simplification before their recess. This leads us to believe that most borrowers will not be applying for loan forgiveness until at least October. So, for the moment, you should still plan on completing your third quarter payroll tax returns before filing for loan forgiveness.
We will keep you posted if we receive any additional significant guidance from Treasury and the SBA.
Dave focuses on tax compliance and planning in the areas of income and estate tax. He is the tax partner for our automotive group but he’s also tapped for his expertise in real estate, manufacturing and professional services. He’s a whiz at estate and gift taxation and can create a customized approach to designing and implementing a successful exit plan for business owners.
You can reach Dave at 714-672-0022.
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