On August 24th, a new set of interim rules were published for  the Payroll Protection Program. This biggest surprise of these rules relate to self rentals. If you own your facility that your business operates from and you normally pay yourself rent (to an LLC that owns the property, for example) you will now be UNABLE to count this rent towards your 40% allowable overhead calculation towards loan forgiveness. Instead, the interest paid during the covered period will be the maximum that you are allowed to apply towards your 40% overhead. If you own your building outright without a mortgage, then no amount of rent/lease is includable towards your forgiveness calculation.

The good thing here is that with the extension to up to 24 weeks of forgiveness, you can reallocate those rent dollars towards payroll and update your forgiveness calculations. So if you selected the 8 week covered period and part of your forgiveness was for rent paid to yourself, you will need to stretch to the 24 week period and redo your math accordingly. Had it not been for the 24 week option, this would be detrimental to the maximum forgiveness for many of you.

They also clarified that the applicable expenses included in a home office deduction are includable by the appropriate percentage of your business use of home. If you  were in business in 2019, you must use the 2019 percentages without modification.

In addition, they clarified the salary limitation to owners of S and C Corporations. If your ownership is under 5%, there is no limitation of wages paid applied towards forgiveness based on the prior year any longer.

If you would like to read further, here is the Journal of Accountancy’s article on this subject.

https://www.journalofaccountancy.com/news/2020/aug/ppp-forgiveness-guidance-addresses-owner-employee-compensation-rent-costs.html

Just like in my previous email on August 14, 2020, we are recommending that borrowers hold off on filing for forgiveness for a little while longer to see if the potential for automatic forgiveness comes to fruition. In addition, many institutions still do not have their submission portal available for borrowers.

Payroll Tax Deferrals

Most of you have seen that the President signed an executive order allowing employers to cease withholding the 6.2% social security from their employees paychecks from September 1 through December 31, 2020. The amounts that would have been withheld are due to be withheld and paid from the period of January 1 through April 30, 2021.

We do not recommend electing to utilize this provision for a variety of reasons. We would want to ensure that employees understand that an effective net pay increase now will result in the opposite in the near future and that some may find the reduced paycheck come January to be unacceptable. However, the biggest reason would be that there is a risk to the employer. If an employee who separated employment at the end of 2020 participated in this deferral, the employer is stuck paying the employee’s social security without recourse to the employee. This poses a substantive risk to the employer. Without the potential of forgiveness of this deferred payroll tax withholding, we do not believe it is in the employer or the employee’s best interest to take advantage of it.

For more information, here is a great article to read:

https://www.bakerdonelson.com/executive-order-deferring-taxes-notice-2020-65-postures-guidance#:~:text=Treasury%20Secretary%20Mnuchin%20stated%20several,paychecks%2C%20despite%20the%20President’s%20Order