The U.S. Small Business Administration issued an Interim Final Rule on August 25, 2020 (the “Rule”), addressing owner-employee compensation and related party nonpayroll costs.

The Rule creates a threshold for owner-employee compensation caps. The Rule states that owner-employees with less than a 5% ownership stake in a C- or S-Corporation are not subject to the owner-employee compensation rule.

The Rule further addresses related party nonpayroll costs. Loan forgiveness for nonpayroll costs must not include any amount attributable to the business operation of a tenant or sub-tenant or, for home-based businesses, household expenses. The Rule provides for various examples to illustrate.

The Rule confirms that related party rent payments are eligible for forgiveness as long as (1) the amount of loan forgiveness 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 mortgage were entered into prior to February 15, 2020. Mortgage interest payments to a related party are not eligible for forgiveness. When applying for forgiveness, the borrower must provide mortgage interest documentation to substantiate the payments. For purposes of the Rule, related party is defined as ownership in common between the business and the property owner.

The Interim Final Rule is available HERE.