U.S. Treasury Issues Guidance on “Owner-Employee” Definition for PPP Loan Forgiveness Calculations

Editor’s Note: Thank you for viewing this resource about the Paycheck Protection Program (PPP). This was a cornerstone for many organizations during the COVID-19 pandemic, but it’s important to stay current on the latest financial support options. Like PPP, the Employee Retention Credit (ERC) can be leveraged to bring your business significant financial relief.

We invite you to dive into our ERC content here. Need professional advice on maximizing your ERC benefits? Learn more about our Employee Retention Credit consulting services and then contact us.

Background

The Paycheck Protection Program (PPP), established within the CARES Act on March 27, 2020, provided small businesses with loans to assist them during the COVID-19 pandemic.  These loans may be forgiven, in whole or in part, subject to certain rules and limitations.  One of these limitations relates to the amount of “Owner-Employee” compensation that is eligible for forgiveness during the covered period of a borrower’s loan (the 8-week or 24-week period beginning on the day the loan proceeds were received).

“Owner-Employee” Defined

On August 24, 2020, the U.S. Treasury issued an Interim Final Rule (IFR) clarifying the definition of an “Owner-Employee”.  Until the release of this IFR, it was unclear whether there was a de minimis ownership percentage in a C-Corp or S-Corp that would exclude employees who owned a small amount of their employer’s stock from the limitations on loan forgiveness imposed on “Owner-Employees”.  The IFR states:

“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 . . . This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.”

As a result of this guidance, borrowers can now confidently compute the amount of payroll costs relating to “Owner-Employees” in their PPP Loan Forgiveness calculation.

How KatzAbosch Can Help

Despite this much needed guidance, we realize that borrowers may still require assistance and have more questions. Each borrower has their own individual set of circumstances, and the answers are not always black and white.  It is important for borrowers to “get in front” of their loan forgiveness and make adjustments before the end of their covered period, if necessary. KatzAbosch helps businesses through the process by providing consulting and guidance for Paycheck Protection Plan (PPP) funds.

We are here to help guide and assist borrowers through this process and help gather required documentation for your lender.  If you have questions about your unique situation, please reach out to your KatzAbosch representative, or contact us.