In late August, the Small Business Administration (SBA) released additional guidance clarifying whether Paycheck Protection Program funds used for rent or mortgage payments are eligible for forgiveness. Fortunately, funds used for these purposes, if paid to an unrelated third party, are forgivable. However, if you own two related businesses, where one pays rent to the other, the payments may not be eligible for loan forgiveness.  A CPA can help determine whether the payments qualify.

Rent Payments to Owners of a Related Business

Many CPAs advise business owners to divide controlling the property location and actually managing business operations into two separate legal entities. Under the new Interim Final Rule (IFR) released by the SBA, rent payments between related parties may be eligible for forgiveness if the operating business was granted a PPP loan and the property is secured by a mortgage loan.

However, PPP was designed to provide relief to small businesses without providing additional benefits to those who choose certain structures. If you own two related businesses, the forgivable amount cannot exceed the interest paid on the mortgage during the PPP loan covered period. This ensures that all business owners are treated equitably, regardless of whether they have a separate interest in the commercial property out of which their company operates. Unfortunately, if there is no mortgage loan on the property that is rented to the related business, then the rent paid would not be an eligible expense for forgiveness purposes.

What Is a “Related Party”?

Under the PPP guidelines, any ownership shared between a business and the entity to which it pays rent are considered related parties. For instance, the owner of the business may also own the building itself or share interest with partners. In other cases, one company may own the building itself and lease part of it out to a subsidiary.

Navigating the complexities of the government’s financial relief programs can be stressful and confusing, which is why Lewisburg, PA, business owners turn to Donna J. Troutman CPA PC. This accounting firm has decades of experience and a constantly updated body of knowledge, and they’ll help you maximize your PPP loan forgiveness amount.  Visit their website for more information on the latest updates to business tax law, or call (570) 523-7337 to meet with a CPA today.