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What You Need To Know About Succession Planning

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Transitioning Ownership

The decisions made regarding ownership of the family office or closely held business may not necessarily be the same decisions that are required for leadership and management. It’s critical to understand and acknowledge the different elements that proper succession planning entails.

The family wealth enterprise has three interconnected circles of participation—the family members, the family’s business and the ownership of wealth—and each circle requires a succession plan. Those plans should reflect the family’s shared values and aspirations, and they should be implemented with business-like focus and diligence that is tailored to each family’s dynamics and relationships.

To successfully transition the family ownership, business and financial wealth to succeeding generations, leaders must be groomed and/or nurtured to assume the mantle of these responsibilities with competence. Moreover, to ensure that the family legacy remains intact and on course, each person assuming a new role must embrace the family’s common vision. Outlining deliberate plans to accomplish related goals across the family, business and ownership will help achieve an orderly, prosperous succession that protects the family legacy for generations to come.
 

What is Succession Planning and Why Is It So Important?

Robust governance practices form the cornerstone of success for the family wealth enterprise, and ongoing succession planning is one element of a mature governance system. As a family considers its future succession, it is vital to understand why a well-conceived plan is so important and what the critical elements of the plan entail. The succession plan prepares heirs to transition successfully and preserve, grow and pass wealth from generation to generation. Otherwise, the family wealth enterprise can diverge from the family’s values, philosophies and direction, which may erode family unity, endanger the legacy and dissipate financial wealth.

Effective governance protects the five forms of family wealth outlined below, and succession planning is a pivotal aspect of governance:

  • Financial capital (money and assets)
  • Human capital (the family members themselves and their skills and experience)
  • Intellectual capital (knowledge, ideas and perspectives)
  • Social capital (professional and social relationships, community involvement and philanthropy)
  • Ethical capital (values, philosophies and responsible practices that improve the lives of others)

Imagine the succession plan as the roadmap that provides all necessary directions to reach the desired destination. It outlines specific roles and a timeline for training heirs to manage of all five forms of family wealth. Thoughtful succession planning also gives business stakeholders confidence about continued stability during times of transition and beyond, thereby increasing the family wealth enterprise’s resilience. Challenges will arise—including economic downturns and changes in the workforce and workplace—so it’s important to prepare for the unexpected.
 

The Elements of Succession Planning

The succession plan must specify ways to prepare heirs to be good stewards of wealth and enable them to understand their evolving roles and responsibilities. The ideal candidates will need to develop their financial literacy and business acumen, as well as leadership and decision-making skills.

Heirs can build financial literacy from a young age by managing their own expenses and then participating in the financial aspects of the family business. Understanding key financial concepts and practices provides a foundation to gain valuable workplace experience and develop business acumen. When heirs understand the finance function and the inner workings of a business, they can think strategically to identify risks and opportunities.

To develop their leadership capabilities, heirs must appreciate the importance of being accountable to others while holding others accountable as well—an especially delicate task when working with family members. Sound leadership requires emotional and social intelligence to communicate effectively, bearing in mind that some family members will receive and process information differently. Strong leadership skills are especially necessary within the business, and these will help heirs thrive in supervisory roles and gain buy-in from stakeholders.

To fill ownership and leadership roles, heirs need to develop their decision-making capabilities as well. They will have to weigh competing interests and make judicious decisions that yield the maximum benefits over the near term and long term. Drawing on leadership skills and business acumen enables heirs to make decisions more effectively. Ultimately, when identifying a successor, it is prudent to empower those who demonstrate a passion for the role and have the necessary skills to make a meaningful contribution.

“Before anything else, preparation is the key to success.” -Alexander Graham Bell
 

Succession Techniques

Succession planning should be rooted in an evaluation of the abilities and desires of those family members who are potentially in line for succession. Future family heirs will need education, training and business experience. Some heirs may not be interested in participating directly or may not have skills conducive to the family’s needs in this area. In some cases, extenuating circumstances (e.g., health issues, conflicting commitments, et al.) may also complicate having certain individuals directly involved in the succession plan.
Ultimately, some heirs may have active involvement while others have passive involvement—such as participating on the board but not engaging in day-to-day activities—so thorough planning and preparation are crucial.

Training and education for succession are key components of a sound plan and enable heirs to develop increasing levels of responsibility. These practices also limit overall risk to the family wealth enterprise by entrusting a specific set of duties to an heir, so they can demonstrate full competency before expanding the scope further. One way, for example, of enabling a family member to obtain this education is by completing an internship at the family business and then taking a position at another organization for a period of time prior to rejoining the family’s business in a permanent role.

An important aspect of family office governance is the family committee (also referred to as the family board or council), which comprises of core family members who review and execute key decisions. Within the family committee, heirs can serve as junior members who attend and observe before getting a voting role, so that they understand the process and responsibilities. It’s also helpful for heirs to have a service mentality in line with the family’s common philanthropic goals, and they can build this by participating in the family foundation, if one exists.

Younger family members can benefit from preparation for board positions as well, which includes receiving mentorship and formal board training. There are also benefits to outlining specific requirements for board participation. From a business standpoint, these steps could be comparable to the process for promoting an employee within the company, and heirs should be prepared to demonstrate a similar level of competence
and accountability.
 

Critical Considerations for Ownership Transitions

Across all three circles of participation in the family wealth enterprise, there are four critical considerations to weigh carefully when transitioning ownership: communicating effectively, ensuring the proper fit, remaining flexible and establishing a new role for senior generations.

Overall, transparency regarding the plan and process helps to increase preparation and avoid conflict. Where necessary, communication can still be restricted on a need-to-know basis. From a timing perspective, different groups of stakeholders will need to be informed about relevant information depending on how aspects of the succession plan affect that group. These stakeholder groups may include family members, direct succession contenders and extend to key employees, crucial third-party professionals and the general public.  The communication strategy must account for the perceptions and reactions that could result. Effective communication and planning can minimize the potential for confusion or resentment. Especially within the family, soliciting input and acknowledging everyone’s viewpoints will help build consensus and prevent simmering discontent.

Ultimately, the most important factor is to select a successor who fits well in the role. While there is no definitive list of characteristics that describe an ideal successor, it’s best to have a combination of relevant experience, business acumen and emotional intelligence. These qualities help a successor address an array of challenges and build trust with key stakeholders.
The ideal leadership traits must be rooted in the family’s shared values, and they can include:

  • Humility: Know what you don’t know and be willing to listen and learn.
  • Accountability: Take responsibility for your decisions and hold others accountable.
  • Maturity: Regardless of age, exercise good judgment and act in the best interests of the family and business.
  • Integrity: Act in accordance with the family values, especially for difficult decisions.
  • Diligence: Work hard, be engaged and lead by example.
  • Cohesion: Be a good teammate, encourage collaboration and foster a shared culture.

As with any plan, flexibility is an important consideration. Remaining responsive to shifting circumstances or unexpected changes should be worked into the overall succession plan. For example, the person chosen as a successor may not be able to fill the role as expected for a range of reasons, such as an unforeseen change in personal obligations or health status. Scenario planning is an important aspect of preparing for a range of contingencies and responding accordingly.

Another critical aspect of planning is mapping out the new role for members of the older generation. They have significant knowledge to impart and are accustomed to holding influential positions, so a natural fit for them could be a board chair or head of the foundation, or both, if applicable. Correlated concerns include identifying any challenges and mitigating fear or resentment, which can come from internal conflict or frustration over a loss of control after decades of leadership. An outside facilitator who specializes in family dynamics can help identify and navigate these concerns in a constructive manner to ease the transition. It’s best to address such conflicts as soon as possible to avoid intervention after the transition.

Involuntary Succession: Preparing for the Unexpected

Unfortunately, some successions are not voluntary. Because there are many different considerations to weigh and significant planning required for a voluntary succession, the process can stall or hit a roadblock. This exposes the organization to greater risk, so it behooves all key stakeholders to make adequate preparations and guard against an involuntary succession, which could be caused by death, disability, the unanticipated sale of the business or other unexpected factors. Thorough preparation and scenario planning help alleviate the effects of an involuntary succession and maintain resilience during unforeseen occurrences.


 The Path to Success

Succession will happen, so it’s important to plan accordingly— and well in advance—to achieve the desired outcome and maintain the family wealth enterprise. The plan should outline specific measures to educate heirs and have them gain experience with finances, leadership and decision making. Each type of succession across the family, business and ownership circles also needs to have its own distinct plan to ensure success, in combination with assessing the right fit for the role and communicating about this effectively.

Adaptability is a key aspect of succession planning, allowing the organization to adjust to unexpected occurrences without significant disruption. Ensuring members of the older generation have a new role to transition into, so that they can impart the value of their wisdom and experience can help to enable a smooth transition. Taking this proactive approach to succession planning positions the family, ownership and business for continued success, which will safeguard the family legacy for generations to come.

Succession Planning in 5 Steps

  1. Determine how heirs will get education and experience with finances, leadership and decision making.
  2. Assess and decide the best fit for the role.
  3. Make a distinct succession plan for the family, business and ownership circles of participation.
  4. Communicate the succession plan to all key stakeholders.
  5. Establish a new role for members of the older generation.

Final BEAT Regulations Issued By Treasury

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On September 1, 2020, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) released final regulations under Section 59A, commonly referred to as the base erosion and anti-abuse tax (BEAT). The final regulations provide additional guidance on the application of the BEAT.

Details

Section 59A imposes on each applicable taxpayer a tax equal to the base erosion minimum tax amount for the taxable year. On December 6, 2019, Treasury published final regulations (TD 9885) under Sections 59A, 383, 1502, 6038A and 6655 (the 2019 final regulations) in the Federal Register (84 FR 66968). On the same date, Treasury also published proposed regulations (REG-112607-19) under Section 59A and proposed amendments to 26 CFR part 1 under Section 6031 of the Code in the Federal Register (84 FR 67046). On February 19, 2020, the Treasury Department and the IRS published a correction to the 2019 final regulations in the Federal Register (85 FR 9369).

The final regulations retain the basic approach and structure of the proposed regulations, with certain revisions. We’ve summarized some of the key aspects to the final regulations, below.
 
The final regulations retain the rule in the proposed regulations that permits the use of a reasonable approach to determine whether a taxpayer’s aggregate group meets the gross receipts test and base erosion percentage test with respect to a short taxable year of the taxpayer.  However, the final regulations clarify that excluding the gross receipts, base erosion tax benefits and deductions of a member from the taxpayer’s aggregate group when the member does not have a taxable year that ends with or within a short taxable year of the taxpayer constitutes an unreasonable approach.1 In addition, to provide guidance for taxpayers in determining whether a particular approach is reasonable and does not over-count nor under-count, the final regulations include examples of methods that may or may not constitute a reasonable approach.2
 
The final regulations provide that when a corporation has a deemed taxable year-end under §1.59A-2(c)(4), the deemed taxable year-end is treated as occurring at the end of the day of the transaction.3 Thus, a new taxable year is deemed to begin at the beginning of the day after the transaction. A taxpayer determines items attributable to the deemed short taxable years ending upon and beginning the day after the deemed taxable year-end by either deeming a close of the corporation’s books or, in the case of items other than extraordinary items, making a pro-rata allocation without a closing of the books.4 Extraordinary items that occur on the day of, but after, the transaction that causes the corporation to join or leave the aggregate group are treated as occurring in the deemed taxable year beginning the next day. For this purpose, the term “extraordinary items” has the meaning provided in §1.1502-76(b)(2)(ii)(C). This term is also expanded to include any other payment that is not made in the ordinary course of business and that would be treated as a base erosion payment.
 
Section 1.59A-2(c)(5)(ii)(A) provides that, if a member of a taxpayer’s aggregate group has more than one taxable year that ends with or within the taxpayer’s taxable year and together those taxable years are comprised of more than 12 months, then the member’s gross receipts, base erosion tax benefits and deductions for those years are annualized to 12 months for purposes of determining the gross receipts and base erosion percentage of the taxpayer’s aggregate group. To annualize, the amount is multiplied by 365 and the result is divided by the total number of days in the year or years.
 
The final regulations also adopt a corresponding rule to address short taxable years of members. Specifically, if a member of the taxpayer’s aggregate group changes its taxable year-end, and as a result the member’s taxable year (or years) ending with or within the taxpayer’s taxable year is comprised of fewer than 12 months, then for purposes of determining the gross receipts and base erosion percentage of the taxpayer’s aggregate group, the member’s gross receipts, base erosion tax benefits and deductions for that year (or years) are annualized to 12 months.5 This rule does not apply if the change in the taxable year-end is a result of the application of §1.1502-76(a), which provides that new members of a consolidated group adopt the common parent’s taxable year. But see §1.59A-2(c)(5)(iii) (providing an anti-abuse rule that applies to transactions with a principal purpose of changing the period taken into account for the gross receipts test or the base erosion percentage test).
 
The final regulations also adopt a corresponding anti-abuse rule to address other types of transactions that may achieve a similar result of excluding gross receipts or base erosion percentage items of a taxpayer or a member of the taxpayer’s aggregate group that are undertaken with a principal purpose of avoiding applicable taxpayer status.6
 
The final regulations provide that gross receipts of foreign predecessor corporations are taken into account only to the extent that the gross receipts are taken into account in determining income that is effectively connected with the conduct of a U.S. trade or business (ECI) of the foreign predecessor corporation, which would be consistent with the ECI rule for gross receipts of foreign corporations in §1.59A-2(d). Section 1.59A-2(c)(6)(i) clarifies that the operating rules set forth in §1.59A-2(c) (aggregation rules) and §1.59A-2(d) (gross receipts test) apply to the same extent in the context of the predecessor rule. Thus, the ECI limitation on gross receipts in §1.59A-2(d)(3) continues to apply to the successor.
 
If a taxpayer elected to forego a deduction and followed specified procedures (the “BEAT waiver election”), the proposed regulations provided that the foregone deduction would not be treated as a base erosion tax benefit.7 The final regulations explicitly clarify that, in order to make or increase the BEAT waiver election under §1.59A-3(c)(6), the taxpayer must determine that the taxpayer could be an applicable taxpayer for BEAT purposes but for the BEAT waiver election. §1.59A-3(c)(6)(i).
 
In addition, when a taxpayer does not make a BEAT waiver election (or when this waiver is not permitted), §1.59A-3(c)(5) and §1.59A-3(c)(6)(i) have no bearing on whether or how a taxpayer’s failure to claim an allowable deduction, or to otherwise “waive” a deduction, is respected or taken into account for tax purposes other than Section 59A.8
 
The final regulations include a provision for the waiver of amounts treated as reductions to gross premiums and other consideration that would otherwise be base erosion tax benefits within the definition of Section 59A(c)(2)(A)(iii) and provide that similar operational and procedural rules apply to this waiver, such as the rule providing that the waiver applies for all purposes of the Code and regulations.9 The BEAT waiver election affects the base erosion tax benefits of the taxpayer, not the amount of premium that the taxpayer pays to a foreign insurer or reinsurer (or the amount received by that foreign insurer or reinsurer). Therefore, for example, the waiver of reduction to gross premiums and other consideration (or of premium payments that are deductions for federal income tax purposes) does not reduce the amount of any insurance premium payments that are subject to insurance excise tax under Section 4371.
 
Regarding the documentation requirements to make the BEAT waiver election, §1.59A-3(c)(6)(ii)(B)(1) of the final regulations omits the requirement to provide a “detailed” description. Section 1.59A-3(c)(6)(ii)(B)(6) and (7) is also revised to make certain non-substantive, clarifying changes.
 
The final regulations have been revised to state more explicitly that a deduction may be waived in part.10 Treasury also states in the preamble to the final regulations that the IRS plans to revise Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts, to incorporate reporting requirements relating to the reporting of deductions that taxpayers have partially waived.
 
Subject to certain special rules in connection with the centralized partnership audit regime enacted in the Bipartisan Budget Act of 2015 (the BBA), the final regulations explicitly permit a corporate partner in a partnership to make a BEAT waiver election with respect to partnership items.11 The final regulations also clarify that a partnership may not make a BEAT waiver election.12 In addition, the final regulations provide that waived deductions are treated as non-deductible expenditures under Section 705(a)(2)(B).13
 
Further, the final regulations provide rules to conform the partner-level waiver with Section 163(j).14 Specifically, the final regulations clarify that, when a partner waives a deduction that was taken into account by the partnership to reduce the partnership’s adjusted taxable income for purposes of determining the partnership-level Section 163(j) limitation, the increase in the partner’s income resulting from the waiver is treated as a partner basis item (as defined in §1.163(j)-6(b)(2)) for the partner, but not the partnership.
 
The final regulations clarify that a partner may make the BEAT waiver election with respect to an increase in a deduction that is attributable to an adjustment made under the BBA audit procedures, but only if the partner is taking into account the partnership adjustments either because the partnership elects to have the partners take into account the adjustments under Sections 6226 or 6227, or because the partner takes into account the adjustments as part of an amended return filed pursuant to Section 6225(c)(2)(A).15 If the partner makes the BEAT waiver election, the partner will compute its additional reporting year tax (as described in §301.6226-3) or the amount due under §301.6225-2(d)(2)(ii)(A), treating the waived amount as provided in §1.59A-3(c)(6).
 
The final regulations clarify that waived deductions attributable to a consolidated group member are treated as noncapital, nondeductible expenses that decrease the tax basis in the member’s stock for purposes of the stock basis rules in §1.1502-32 to prevent the shareholder from subsequently benefitting from a waived deduction when disposing of the member’s stock.16
 
The final regulations in §1.59A-3(b)(3)(iii)(C) expand the ECI exception, whereby a base erosion payment does not result from amounts paid or accrued to a foreign related party that are subject to tax as ECI, to apply to certain partnership transactions. The expanded ECI exception in §1.59A-3(b)(3)(iii)(C) applies if the exception in §1.59A-3(b)(3)(iii)(A) or (B) would have applied to the payment or accrual as characterized under §1.59A-7(b) and (c) for purposes of Section 59A (assuming any necessary withholding certificate were obtained).
 
The ECI exception reflected in §1.59A-3(b)(3)(iii)(C) also may apply in other situations, such as when (1) a U.S. taxpayer contributes cash and a foreign related party of the U.S. taxpayer contributes depreciable property to the partnership (see §1.59A-7(c)(3)(iii)), (2) a partnership with a partner that is a foreign related party of the taxpayer partner engages in a transaction with the taxpayer (see §1.59A-7(c)(1)) or (3) a partnership engages in a transaction with a foreign related party of a partner in the partnership (id.).
 
The general ECI exception reflected in §1.59A-3(b)(3)(iii)(A) would not apply if a U.S. person purchased depreciable or amortizable property from a foreign related party and that property was not held in connection with a U.S. trade or business. Similarly, when a U.S. person is treated as purchasing the same depreciable or amortizable property from a foreign related party under §1.59A-7(c)(3)(iii) because the foreign related party contributes that property to a partnership, the ECI exception does not apply even though the property becomes a partnership asset after the transaction and the partnership uses the property in its U.S. trade or business.
 
To implement this addition, the final regulations include modified certification procedures similar to those set forth in §1.59A-3(b)(3)(iii)(A) in order for the taxpayer to qualify for this exception. Specifically, the final regulations require a taxpayer to obtain a written statement from a foreign related party that is comparable to a withholding certification provided under §1.59A-3(b)(3)(iii)(A), but which takes into account that the transaction is a deemed transaction under §1.59A-7(b) or (c) rather than a transaction for which the foreign related party is required to report ECI. The taxpayer may rely on the written statement unless it has reason to know or actual knowledge that the statement is incorrect.
 
The final regulations provide that the partnership anti-abuse rule for derivatives does not apply when a payment with respect to a derivative on a partnership asset qualifies for the qualified derivative payment (QDP) exception.17
 
The 2019 final regulations include an anti-abuse rule that provides that if a transaction, plan or arrangement has a principal purpose of increasing the adjusted basis of property that a taxpayer acquires in a specified nonrecognition transaction, the nonrecognition exception of §1.59A-3(b)(3)(viii)(A) will not apply to the nonrecognition transaction. Additionally, §1.59A-9(b)(4) contains an irrebuttable presumption that a transaction, plan or arrangement between related parties that increases the adjusted basis of property within the six-month period before the taxpayer acquires the property in a specified nonrecognition transaction has a principal purpose of increasing the adjusted basis of property that a taxpayer acquires in a nonrecognition transaction. The final regulations modify the anti-abuse rule to now provide that when the rule applies, its effect is to turn off the application of the specified nonrecognition transaction exception only to the extent of the basis step-up amount. Second, §1.59A-9(b)(4) has been revised to clarify that the transaction, plan, or arrangement with a principal purpose of increasing the adjusted basis of property must also have a connection to the acquisition of the property by the taxpayer in a specified nonrecognition transaction.
 
The final regulations generally apply to taxable years beginning on or after the date of publication in the Federal Register. The rules in §§1.59A-7(c)(5)(v) and (g)(2)(x), and 1.59A-9(b)(5) and (6) apply to taxable years ending on or after December 2, 2019. Taxpayers may apply the final regulations in their entirety for taxable years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply these regulations in their entirety for all subsequent taxable years.18 Alternatively, taxpayers may apply only §1.59A-3(c)(5) and (6) for taxable years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply §1.59A-3(c)(5) and (6) in their entirety for all subsequent taxable years. Taxpayers may also rely on §§1.59A-2(c)(2)(ii) and (c)(4) through (6), and 1.59A-3(c)(5) and (c)(6) of the proposed regulations in their entirety for taxable years beginning after December 31, 2017, and before the date of publication in the Federal Register.
 
For additional details, including items not discussed in this summary, see the final regulations.  

UPCO Insights

Despite numerous comments, the final regulations retain the rule in the proposed regulations and do not permit a taxpayer to decrease the amount of deductions that are waived either by filing an amended federal income tax return or during an examination.

PPP Loan Forgiveness Update: Change For 5% Owner-Employees Of Corporations And Certain Non-Payroll Costs

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On August 24, the Small Business Administration (SBA) issued an Interim Final Rule (IFR) that, for the first time, sets a de minimis rule for Paycheck Protection Program (PPP) loan forgiveness for owner-employees who own less than 5% of a corporation. The IFR also provides additional guidance on PPP loan forgiveness of certain nonpayroll costs. The IFR is effective immediately.


New Rule for 5% Owners of Corporations

SBA guidance on PPP loan repayment from May and June capped the amount of loan forgiveness for owner-employee payroll compensation and attempted to explain what that meant for different types of entities – with different results for C corporations, S corporations, limited liability companies (LLCs), general partnerships, and sole proprietorships.  But the earlier guidance did not set forth any exceptions based on the owner-employee’s percentage of ownership.

Under the new IFR, any individual with a less than 5% ownership stake in a PPP borrower that is a C corporation or S corporation is now exempt from the special PPP owner-employee compensation rules when determining the amount of their compensation that is eligible for PPP loan forgiveness. Less than 5% corporate owner-employees can now use the more favorable nonowner rules for payroll costs to be forgiven.

In issuing the de minimis ownership rule for C and S corporation owners, the SBA said that the exemption was intended “to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.” The new IFR creates different results based on the PPP borrower’s choice of entity.

Accordingly, borrowers may want to revisit their PPP loan forgiveness application to increase payroll costs for owner-employees who own less than 5% of a corporation.

UPCO Insight

The new IFR did not address LLCs, partnerships or sole proprietorships, so the 5% owner exception appears to be limited only to corporations for the time being. The owners of LLCs taxed as partnerships might not be covered. Regardless, not all partners are treated as owner-employees because earlier guidance applied the owner-employee rules only to general partners.

New Nonpayroll Cost Rules

The IFR sets out new limits for PPP loan forgiveness on rent payments and mortgage interest payments made to “related parties.” The IFR says: “Any ownership in common between the business and the property owner is a related party for these purposes.” So the typical controlled group, affiliated service group or common control rules (including family or other attribution rules) do not apply in determining if the parties are related for PPP loan forgiveness of nonpayroll costs. Now, rent or lease payments to related parties qualify for forgiveness only if (1) the payments don’t exceed the amount of mortgage interest owed on the property during the covered period that is attributable to space rented by the business, and (2) the lease and mortgage were entered into before February 15, 2020. The IFR also says that mortgage interest payments made to a related party are not eligible for PPP loan forgiveness.

Finally, the new IFR says that nonpayroll amounts attributable to a business operation of a tenant or subtenant of a PPP borrower are not eligible for forgiveness.

UPCO Insights

Many businesses pay rent to their owners that don’t have a mortgage on the property. Nothing in the CARES Act or prior IFRs hinted at these new limitations based on a landlord-tenant or related party relationship, so many borrowers likely included those amounts in their expected PPP forgiveness calculations.

Accordingly, borrowers may want to revisit the PPP loan forgiveness documentation to eliminate (1) rent paid to related parties that exceeds the interest on the property’s mortgage, (2) any nonpayroll expense that is reimbursed by a sublease tenant, and (3) mortgage interest payments to a related party.