Overview of the American Rescue Plan Act from IRS (May 13, 2021)
IRS provides overview of key tax provisions in American Rescue Plan Act, including retroactive tax benefits for 2020
SBA Releases New PPP Guidance: (Jan 19, 2021)
Article from Journal of Accountancy
How to calculate revenue reduction and max loan amounts for second-draw loans
Tax Relief and Second Draw PPP Financing Opportunities for Businesses (Jan 12, 2021)
The Consolidated Appropriations Act (CAA), signed into law in December 2020, is known for authorizing a second round of direct stimulus payments to individuals and extending enhanced unemployment benefits. But the law also provides tax relief and new financing opportunities for businesses affected by the COVID-19 pandemic. Following are highlights of key provisions:
New PPP Financing Available
Eligible small businesses that previously received forgivable Paycheck Protection Program (PPP) loans may apply for a “second draw,” provided they’ve used or will use all the proceeds of their original loans by the time a second draw is disbursed. Generally, to qualify for an additional loan, you must have 300 employees or less and demonstrate a 25%-or-more decline in gross receipts in any quarter of 2020 compared to the same quarter in 2019. (Special eligibility rules apply to businesses that didn’t exist during some or all of 2019.)
Like the first round of PPP loans, you may receive up to 2½ times your average monthly payroll costs in 2019 (or in the one-year period preceding the date of the loan), but new loans are capped at $2 million. Businesses that are ineligible for a second draw may be able to increase the amount of their original PPP loans. Also, the CAA permits certain businesses that didn’t previously receive PPP loans to apply for them. But you will have to act quickly: Applications are due by March 31, 2021.
PPP Expenses Deductible
The CARES Act, which established the PPP program, provided that the amount of PPP loan forgiveness isn’t included in a borrower’s gross income for tax purposes. But last year, the IRS essentially erased this tax benefit by ruling that borrowers may not deduct expenses paid with the proceeds of loans that have been (or likely will be) forgiven.
The CAA restores the tax advantages of loan forgiveness by overruling the IRS and providing that otherwise deductible expenses remain deductible regardless of whether a loan is forgiven.
Allowable Loan Uses Expanded
As before, to qualify for forgiveness, applicants must use at least 60% of a PPP loan’s proceeds for payroll. But the CAA expands the allowable nonpayroll uses beyond mortgage, rent and utility expenses, to include:
“Covered operations expenditures” for software or cloud computing services that facilitate business operations,
“Covered property damage costs” related to vandalism or looting due to public disturbances in 2020 and not covered by insurance or otherwise reimbursed,
“Covered supplier costs” for goods that are essential to business operations and meet certain requirements, and
“Covered worker protection expenditures” to comply with health guidelines, such as expenses for creating drive-through window facilities or air filtration systems.
The CAA also clarifies that payroll costs, for PPP purposes, include employer-provided group life, dental, vision or disability insurance.
Other PPP Updates of Interest
Modified covered period. The “covered period” is the one during which PPP loan proceeds must be spent on eligible expenses in order to qualify for forgiveness. Originally, the covered period was eight weeks from the time the loan is made. Later, it was extended to 24 weeks, although borrowers that received loans before June 5, 2020, could choose either an eight-week or 24-week period. Now, borrowers can choose a covered period of any length between eight and 24 weeks.
Simplified forgiveness application procedures. The CAA allows businesses that borrow less than $150,000 to simply certify that they meet the 25% revenue loss requirement. However, they must substantiate compliance with this requirement when (or before) they submit a forgiveness application. Finally, the CAA simplifies the forgiveness application for PPP loans under $150,000.
Year-End Stimulus Bill: Christmas Eve Update (Dec. 24, 2020)
To provide the most recent update on the COVID-19 stimulus bill and clarify our previous release, President Trump has pushed the bill back to Congress to increase the individual economic stimulus payments from $600 per individual to $2,000. The House GOP rejected the President’s request, and talks will continue. The President may ultimately fight the bill up through the January 3rd deadline, or Congress may have enough votes to override any veto measure.
Year-End COVID-19 Stimulus Bill Passes (Dec. 24, 2020)
As 2020 concludes, there has been hope that the Federal government could implement a stimulus program designed to provide additional aid to individuals and small businesses during the COVID-19 pandemic. While this bill has not yet been signed by the President, it has passed both the House and the Senate, and the final details have started to become clear this week.
Individual Stimulus Payments
The bill contains a second round of individual stimulus payments at $600 for an individual and $1,200 for a married filing jointly couple. There will also be $600 provided for each dependent under the age of 17. The second round of stimulus payments will have the same basic structure as the first round of payments in terms of income phaseouts and how the ultimate credit will be calculated on the taxpayer’s 2020 tax return. The stimulus payment begins to phase out at $75,000 AGI for an individual and $150,000 for a married filing jointly couple. At the time of this article, President Trump has requested Congress increase the individual stimulus payments to a higher amount before signing the bill into law.
PPP Tax Impact
An unexpected technicality has led many businesses to learn that their uses of PPP funds would not be deductible, essentially creating a “taxable forgiveness” scenario. This result was determined from an IRS interpretation, and was not Congress’s intent with the Paycheck Protection Program. The new law amends the original version and specifically allows a deduction for the use of forgivable PPP loan expenses, which will mean the IRS’ interpretation will no longer be applied to the PPP loans. The amendment will truly allow for the PPP loans to be forgiven ‘tax-free.’ This amendment applies to all PPP loans, even those that have already been forgiven.
Eligible PPP Expenses Added
We will keep this section more high-level, but additional business expenses will now qualify towards PPP loan forgiveness. This includes eligible software and cloud computing expenses, costs relating to property destruction from vandalism in 2020 not covered by insurance, certain costs relating to supplier orders, and certain expenses designed to provide employee protection from COVID-19. Borrowers will still need to use 60% of their PPP funds for payroll expenses to receive full forgiveness.
Additional PPP Funding
The new law creates a second round of PPP funding for eligible small businesses, nonprofit organizations, and self-employed individuals. To be eligible for the second round of funding, an applicant must have 300 or fewer employees and have experienced a 25% reduction in gross receipts for any quarter in 2020 compared to that same quarter in 2019.
The same calculation will be used to determine PPP funding amounts (2.5x average monthly payroll in 2019) except for the hospitality industry, which will be able to take out additional PPP loans equal to 3.5x their average 2019 monthly payroll.
EIDL Advance Changes
The new law also appears to remove the taxability of the EIDL advance and remove the requirement that the EIDL advance be deducted from the PPP forgiveness calculations. Additionally, there will be funding available for business entities and self-employed individuals who did not participate in the first round of PPP funding.
Simplified Forgiveness for Smaller PPP Loans
A one-page forgiveness application form will now automatically be provided for PPP loans under $150,000, and they will not be subject to the FTE or employee pay rate forgiveness reductions put in place for other PPP loans.
Grants for Event and Venue Operators
Additional SBA grants designed to replace a significant amount of revenue will be available for identified entertainment industries. Live venue operators, promoters, theatrical producers, performing art organizations, museum operators, movie theatre operators and talent representatives appear to fall under this category. Qualifying businesses will need to show a 25% revenue reduction for any quarter in 2020 compared to that same quarter in 2019.
Additional Business and Tax Provisions Included in Bill
The bill extends the date that any employee payroll tax deferral must be paid. The payroll taxes now must be repaid by December 31, 2021 as opposed to April 30, 2021.
FFCRA payroll credits have been extended from December 31, 2020 to March 31, 2021.
The bill authorized the SBA to pay an additional three months of principal and interest for eligible Section 7 loans beginning in February 2021.
The Employee Retention Credit has been extended to July 1, 2021. Additional flexibilities were also provided regarding the calculation of the credit. For the first two quarters of 2021, the applicable credit percentage was increased from 50% to 70%, and the employee qualified wage threshold has been increased to $10,000 per quarter as opposed to $10,000 on an annual basis. A business now also needs to have a 20% drop in quarter over quarter gross receipts as opposed to 50%.
It also appears that a business may qualify for both the Employee Retention Credit and PPP loan forgiveness under the current bill beginning in 2021.
Business meals will be 100% deductible in 2021 and 2022 so long as they are considered “restaurant” meals.
The 100% AGI limitation for charitable contributions has been extended into 2021. Additionally, for individuals who do not itemize their deductions, a Married Filing Jointly return with eligible charitable contributions can now qualify for a $600 “above the line” deduction as opposed to $300.
Permanent extension of the 7.5% AGI limitation for individual medical expense deductions, as opposed to 10%.
The bill also includes other miscellaneous business and individual credit extensions, as well as phaseout increases.
We will continue to monitor the progress of the bill and try to timely update our clients as the final bill becomes law. Additional commentary provided by The Journal of Accountancy has been linked here. https://www.journalofaccountancy.com/news/2020/dec/covid-19-relief-bill-addresses-key-ppp-issues.html
If you have questions about this new bill, feel free to reach out to your point of contact at Baden Gage & Schroeder or email us at firstname.lastname@example.org or call 1-800-830-2551.
IRS Issues Additional Guidance on PPP Tax Implications and Timing (Nov. 19, 2020)
On November 18, 2020, the IRS issued Rev. Rul. 2020-27 that provides more guidance on the rules for deducting expenses associated with the Paycheck Protection Program loan. The IRS has stated that there is “no deduction allowed for an eligible expense that is otherwise deductible, if the payment of the eligible expense results in forgiveness of the covered loan.” Additionally, the IRS is stating that these expenses paid or incurred in the taxable year cannot be deducted at the end of such taxable year when the borrower has reasonable expectation of reimbursement or forgiveness, even if the application for forgiveness has not yet been submitted. These eligible expenses are the covered payroll, utility, rent, and/or mortgage interest payments used to calculate loan forgiveness under the Payroll Protection Program.
Therefore, taxpayers who have already incurred the expenses eligible for forgiveness and expect to receive forgiveness may not deduct those expenses in 2020. This also includes those who have not completed the application for forgiveness but intend to do so in 2021. The ruling applies to these taxpayers because at the end of the taxable year, they know the amount of the eligible expenses and the reimbursement is reasonably expected to occur in the coming year.
Rev. Rul. 2020-27 gives two different scenarios:
Scenario 1: Taxpayer A has paid their eligible expenses during the cover period beginning February 15, 2020, through December 31, 2020. In November 2020, Taxpayer A applies for forgiveness using the expenses paid during the covered period. The lender does not inform Taxpayer A on whether the loan will be forgiven, but at that time, based on the payment of the expenses, all requirements for forgiveness are satisfied.
Scenario 2: Taxpayer B paid the same eligible expenses during the covered period. Unlike Taxpayer A, Taxpayer B did not apply for forgiveness before the end of 2020 and decides to apply in 2021. Since Taxpayer B paid all eligible expenses during the covered period, all other requirements for forgiveness are satisfied.
For both scenarios, Taxpayer A and Taxpayer B satisfied all other requirements and knew of the amount of eligible expenses paid for. This concludes they had reasonable expectation of reimbursement and it was foreseeable, resulting in disallowed deductions of expenses in 2020.
Safe Harbor for Loan Participants
A safe harbor for certain PPP loan participants who have loans that have been partially or fully denied or who decided to forgo applying for forgiveness is provided by the IRS. Revenue Procedure 2020-51 allows loan participants to claim a deduction for eligible payments in 2020.
A taxpayer needs to meet the following requirements to be eligible for safe harbor:
The eligible expenses are paid or incurred during the 2020 taxable year.
The taxpayer received a PPP loan and at the end of 2020 expects the loan to be forgiven after the 2020 taxable year.
In a subsequent year, the taxpayer’s request for forgiveness is denied, in whole or in part, or the taxpayer decides to never complete an application for forgiveness.
If eligible, taxpayers may go forward with safe harbor procedures by deducting eligible expenses on a timely filed (including extensions) income tax return for the 2020 taxable year or the subsequent taxable year. The taxpayer can deduct the expenses thought to be nondeductible on a timely filed return or can amend the return in the taxable year.
If you have questions about this new PPP guidance, feel free to reach out to your point of contact at Baden Gage & Schroeder or email us at email@example.com or call 1-800-830-2551.
Recent Updates to Paycheck Protection Program (Oct 12, 2020)
In the last two weeks, recipients of the Paycheck Protection Program (PPP) have been receiving guidance piece by piece on how to move forward with loan forgiveness. The Small Business Administration (SBA) and Department of the Treasury released the following new information and guidance about the program.
Guidance on PPP Deferral Period
The SBA added clarification to its “frequently asked questions” section regarding the deferral of borrower payments. This clarification states that the extension of the deferral period granted under the Paycheck Protection Program Flexibility Act of 2020 will automatically apply to all PPP loans. Borrowers will be notified of this change, and no changes need made to any existing promissory notes.
The Paycheck Protection Flexibility Act of 2020 extended the deferral period for payments to 10 months after the end of the borrower’s PPP covered period if the borrower has not received loan forgiveness.
Loan <$50k Given Streamlined Process
The SBA and Department of the Treasury released a simplified loan forgiveness application for Paycheck Protection Program loans of $50,000 or less. Under this streamlined provision, the PPP loan recipient does not need to certify nor calculate if employee headcounts or salaries were reduced during the covered period. The simplification also moves the application to more of a “check the box” process for these borrowers. Even though these borrowers will be exempt from these potential forgiveness reductions, they still must submit proper documentation to lenders to substantiate their payroll costs or other forgivable expenses. Borrowers can use the new SBA Form 3508S application to utilize this provision.
PPP Changes of Ownership Guidance
Under new guidance from the SBA, if an entity with a PPP loan changes ownership, the borrowers must first notify their PPP lenders in writing prior to closing when any of the following facts apply:
At least 20% of common stock or other ownership interest in a PPP borrower is sold or transferred (including to affiliates);
The borrower sells or transfers at least 50% of its assets (measured by fair market value); or
The borrower merges with another entity.
The PPP lender may approve the change in ownership without prior SBA approval in certain circumstances.
For all ownership changes, the borrower remains responsible for fulfilling loan obligations, related certifications and retaining all required documentation. The full notice from the SBA can be read here: Procedural Notice on PPP Loans and Changes of Ownership
Learn More about PPP by Registering for Our Webinar
On Monday, Oct. 26, 2020, from 2-3 pm, please join our Baden CPA professionals, Kara Smith, Melissa Bradberry, Shawn Sollenberger and Tyler Engstrom, for an updated discussion about Paycheck Protection Program (PPP) loans including:
PPP Loan Forgiveness Applications
GAAP Treatment for Financial Statements
PPP Tax Implications
We will also be comparing Trump/Biden tax plans for the upcoming presidential election. There will be a Q&A opportunity at the end of the webinar. Register Now
PPP Loan Forgiveness: How CPAs Should Advise Clients (Sept 28, 2020)
With so much uncertainty still in the PPP loan forgiveness process, The Journal of Accountancy is recommending that CPAs proceed with caution when advising clients. This article is a good summary of the gray areas still surrounding PPP forgiveness. According to the article, "The wise course is to begin preparing the forgiveness application and stay on top of documentation requirements but also be patient with the process as substantial areas are settled. To help you explain the current situation to business owners and leaders, let’s take a look at a collection of PPP questions, key facts, and best practices." (see link below for full article)
New PPP Loan Guidance: Related Party Rent and Owner-Employee Comp (Aug 27, 2020)
New PPP loan guidance was released on Mon., Aug. 24 by the Small Business Administration (SBA) and Treasury. In the new interim rule, changes were made to three main areas: owner-employee compensation, related party rent/lease payments and tenant/subtenant costs. Below are some highlights of those changes:
New definition of owner-employee for S or C corporations: The owner-employee compensation limitations for S or C corporate shareholders do not apply to shareholders with less than 5% ownership.
Related party rent/lease payments limitation:
Limited to the amount of mortgage interest owed on the property during the covered period (as long as the lease and mortgage were in place prior to 2/15/2020)
Mortgage interest payments to a related party are not considered an eligible cost
This limitation applies if there is ANY common ownership between the business and the property owner.
Shared rent, mortgage interest and utility costs: The new guidance offers four examples on how to segregate expenses when the borrower is subleasing or sharing space with another business.
Below are two links that offer more guidance on the above items from the SBA and Journal of Accountancy.
Updated PPP Loan Forgiveness FAQs Published by SBA (Aug 13, 2020)
The Small Business Administration (SBA), in consultation with the Department of the Treasury, is providing this guidance to address borrower and lender questions concerning forgiveness of Paycheck Protection Program (PPP) loans.
Link to FAQs
PPP Loan Forgiveness FAQs Published by SBA (Aug 4, 2020)
The Small Business Administration (SBA), in consultation with the Department of the Treasury, is providing this guidance to address borrower and lender questions concerning forgiveness of Paycheck Protection Program (PPP) loans.
Link to FAQs
5 Reasons Borrowers Shouldn't Rush Their PPP Forgiveness Applications (July 20, 2020)
Borrowers who received Paycheck Protection Program (PPP) loans under the Coronavirus Aid, Relief, and Economic Security (CARES) Act are asking their CPAs if and how they will qualify for PPP loan forgiveness.
This blog was published by the AICPA on July 14, 2020. We believe that it provides sound advice for clients who have received PPP loans. Please select the link below for the full article.
Link to PPP Article from AICPA
Webinar: PPP Loan Forgiveness Update
Thursday, June 25, 2020 at 10-11 am
Further guidance for PPP loan forgiveness was released on June 16 providing an application for loan forgiveness and application instructions. We will be reviewing this new information along with some highlights of the recent PPP Flexibility Act of 2020. Below are links for the newly published application and instructions:
How do you account for a PPP loan on your annual financial statements? We will also be covering this topic briefly for borrowers, following some recently released guidance from the AICPA on how nongovernmental entities should account for PPP loans using GAAP.
PPP Flexibility Act Signed into Law by President Trump (June 8, 2020)
On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 into law. The Act makes several changes to the Paycheck Protection Program (PPP) that had been introduced under the CARES Act. While these changes will require additional guidance to provide stakeholders the mechanics required to apply for forgiveness under the new rules, we are able to summarize the high points of the Bill below:
The most notable change provided by the Bill deals with the length of the covered period. Borrowers will now have 24 weeks to pay or incur both payroll and non-payroll costs that would be eligible for forgiveness under the original guidelines. Before this Act, borrowers only had eight weeks to incur or pay eligible costs. If a borrower received their PPP funds prior to the new Act, they will have the option to elect the original covered period length of eight weeks.
Originally borrowers were required to spend 75% of their loan proceeds on payroll costs in order to obtain full forgiveness. Under the new Act, this threshold has been reduced to 60%. Guidance issued from the SBA and Treasury Secretary Steven Mnuchin on June 8 clarified that partial forgiveness would still be available for borrowers who did not meet the new 60% standard. The joint statement confirmed that at least 60% of the loan forgiveness amount would need to be used for eligible payroll costs.
The new Act has extended the minimum required maturity length for costs that are not ultimately forgiven. Under the CARES Act, the maturity date would be two years. Now, for loans funded after the date of this Act, this maturity date has been extended to a minimum of five years.
The FTE and wage reduction safe harbor dates have been extended from June 30, 2020, to December 31, 2020. This safe harbor provides a date that employers can utilize to restore their employment levels to that which is required to obtain full forgiveness, in the event that they are not able to restore employment to an adequate level during the covered period itself.
The Act adds a new safe harbor for reductions in FTEs for borrowers unable to rehire employees or restore their business activity as it was prior to COVID-19. The new safe harbor states that a reduction in FTEs will not harm a borrower’s forgiveness calculation if:
The borrower is unable to rehire those who were employees on Feb. 15, 2020, and unable to hire employees with comparable qualifications for vacant positions on or before Dec. 31, 2020; OR
The borrower is unable to achieve the same business level as before Feb. 15, 2020, due to compliance requirements issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the time range of March 1, 2020 - Dec. 31, 2020. The compliance requirements would need to arise due to safety concerns surrounding COVID-19.
A borrower under the Paycheck Protection Program can now participate in the deferral of payroll taxes, as was afforded to other businesses under the CARES Act. Under this provision, a business can defer its remaining payroll taxes for 2020. Fifty percent of the deferred amount will become due by Dec. 31, 2021, while the remaining 50% would be due by Dec. 31, 2022.
As stated previously, we will await further guidance and detailed explanations regarding these provisions. Additionally, we could receive further changes relating to the structure of the program. Baden Gage & Schroeder continues to monitor developments as they relate to COVID-19 relief initiatives and will provide updates as information becomes available. If you have any questions regarding this Act or your PPP loan in general, please do not hesitate to reach out to us at 1-800-830-2551 or firstname.lastname@example.org
PPP Flexibility Act Passes Senate (June 4, 2020)
On June 3, the Senate passed the House-approved Paycheck Protection Program (PPP) Flexibility Act. The bill now waits for the President’s signature. Key highlights in the bill include:
Extending the loan repayment period from two to five years
Extending the covered period borrowers have to use the funds from eight weeks to 24 weeks
Allowing borrowers who receive loan forgiveness to also defer payroll taxes
As defined in the law, the payroll expenditure requirement drops from 75% to 60%, but is now a cliff
Pushing back the rehire date from June 30 to Dec. 31, 2020
SBA Increases PPP Loan Amounts to Include Partner Compensation (May 14, 2020)
The Small Business Administration (SBA) has released additional interim final rules Final Rule 9 (“IFR 9“) providing guidance on the ability to increase certain PPP loans for partnerships and seasonal employers. Some PPP loans were approved to partnerships or seasonal employers before the additional guidance was issued and, as a result, those businesses may not have received PPP loans in the maximum amount for which they are eligible. If you think you might be eligible, you should contact your bank to verify.
Language from Interim Rule (IFR 9):
If a partnership received a PPP loan that did not include any compensation for its partners, can the loan amount be increased to include partner compensation?
Yes. If a partnership received a PPP loan that only included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation, the lender may electronically submit a request through SBA’s E-Tran Servicing site to increase the PPP loan amount to include appropriate partner compensation, even if the loan has been fully disbursed, provided that the lender’s first SBA Form 1502 report to SBA on the PPP loan has not been submitted. After the initial SBA Form 1502 report on the PPP loan has been submitted to SBA, or after the date the first SBA Form 1502 was required to be submitted to SBA, the loan cannot be increased. In no event can the increased loan amount exceed the maximum loan amount allowed under the PPP Program, which is $10 million for an individual borrower or $20 million for a corporate group. Additionally, the borrower must provide the lender with required documentation to support the calculation of the increase.
PPP Borrowers with Less than $2M Given Safe Harbor (May 13, 2020)
New guidance was released today by the Small Business Administration on determining “necessity” of the Paycheck Protection Program loans. Borrowers with loans less than $2 million will have a safe harbor for establishing a good-faith certification concerning their loan request. These borrowers “will be deemed to have made the required certification concerning the necessity of the loan request in good faith” This guidance was released today by the SBA as a new FAQ #46. The entire updated FAQ is linked here.
Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?
Answer: When submitting a PPP application, all borrowers must certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.
We understand how the COVID-19 crisis and changing legislation have made it difficult to make business decisions. As such, we will continue to monitor these changes and discuss the impact with our clients. If you should have any follow-up questions from this article, please do not hesitate to reach out to your point of contact at Baden Gage & Schroeder, LLC.
Economic Necessity and Repayment for PPP Loans Explained (May 6, 2020)
When the Paycheck Protection Program (PPP) was introduced in March, most companies were concerned about qualifying for loan forgiveness. Fast forward to early May, now companies are focused on certifying that they have an “economic necessity” to obtain these loans.
The PPP program's intent is to provide funds for payroll and certain other approved expenditures for borrowers that have determined, in good faith, that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” However, some applicants have applied that may not meet the United States Treasury's (Treasury) or Small Business Administration's (SBA) current definition of “need.”
On April 23, 2020, which was 20 days after applications could first be submitted for PPP loans, the Treasury and SBA provided their first guidance on the “need” issue in the form of Frequently Asked Question #31 (FAQ #31), which states:
“Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.”
Repayment Options and Extensions
If a borrower decides that there is not an economic need and wishes to return the funds, the SBA is allowing any borrower who applied for a PPP loan prior to April 24, 2020 and repays the loan in full by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith. The SBA published additional guidance (44 FAQs – FAQ #43) on May 5 extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Practical Tips for Staying in Compliance
Here are some common-sense steps for keeping in compliance with the necessity certification:
Document and retain your application files
Consider writing a position statement identifying all of the reasons why your business needs the PPP loan
Maintain a file with your approval documentation (emails with lenders, receipt of funds)
Maintain and retain record of the utilization of funds. This step is critical for the forgiveness portion of the loan.
Retain key records for 10 years after loan is forgiven, paid, or both.
Current Forgiveness Rules
The amount eligible for forgiveness depends in part on what you spend the money on for the eight weeks following the distribution of funds. We are still waiting on final guidelines for the actual calculation, but we do know that a PPP loan can be forgiven if it is used on the following categories of costs during the eight-week period (SBA Rules & Regulations):
Payroll costs, including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual)
Benefits for employees including group health care expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums)
Interest on mortgage obligations on real or personal property incurred before February 15, 2020
Rent payments on lease agreements in force before February 15, 2020
Utility payments under the service agreements dated before February 15, 2020
Tax Implications for Accepting Loans
The debt forgiveness is tax-free to borrowers, but an entity cannot deduct the expenses (e.g., payroll, rent, utilities) that were used to compute the debt forgiveness. On April 30, 2020, the IRS released Notice 2020-32 confirming that an entity cannot claim tax deductions, even if the wages, rent, etc. are normally fully deductible.
On May 1, 2020, the AICPA announced that they are challenging the nondeductibility of PPP-related expenses because it believes the intent of the CARES Act was to allow businesses to deduct all their ordinary and necessary expenses. Edward Karl, the AICPA Vice President – Tax Policy & Advocacy, says he is hopeful that we’ll see movement on the legislative front this week.
Baden Gage & Schroeder will continue to monitor developments as they relate to COVID-19 relief initiatives and will provide updates as information becomes available. If you have questions about any of this information, please reach out to us at 1-800-830-2551 or email@example.com
PPP Loan Forgiveness Question #40 (May 4, 2020)
The SBA issued a few new questions including FAQ #40, which applies to forgiveness if you try to rehire a laid off employee and that employee declines the offer. The entire updated FAQ is linked below.
Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
For the full list of FAQs updated/published by the SBA on May 3, 2020, select this link
Deductibility of PPP Expenses (April 21, 2020) (Updated May 1, 2020)
The debt forgiveness is tax-free to borrowers
, but an entity cannot deduct the expenses
(e.g., payroll, rent, utilities) that were used to compute the debt forgiveness. The IRS released Notice 2020-32
confirming that an entity cannot claim tax deductions, even if the wages, rent, etc. are normally fully deductible.
Will COD income increase stock basis? Currently Section 108 (e) (7) does not permit a basis increase for COD income for S-corporations. If the deduction for the expenses is allowed and the COD income is not taxable, many S-corps will lack the basis to take distributions and indirectly the COD income will become taxable.
AICPA Recommendations for Paycheck Protection Program (April 30, 2020)
The American Institute of CPAs (AICPA) issued a series of recommendations it would like to see the U.S. Small Business Administration (SBA) adopt and issue as guidance for small businesses to use in calculating loan forgiveness under the Paycheck Protection Program (PPP).
In the release, the AICPA urges that:
The eight-week covered period under PPP should align with the beginning of a pay period, not the date loan proceeds are received.
The eight-week period should be flexible, with businesses able to choose to commence it once stay-at-home restrictions are lifted instead of when loan proceeds are received.
Full-time equivalents (FTEs) should be calculated using a simple wage-based proxy when hours worked are not tracked by the employer (e.g., for salaried workers or those paid by piece).
Payroll reduction calculations should be based on an employee’s average payroll per week in the eight-week period compared to the prior quarter, rather than comparing total compensation in the periods. Loan forgiveness is reduced if an employee’s compensation decreases by more than 25% but an eight-week period will naturally have 33% less payroll than a 12-week quarter.
Economic Uncertainty Requirement for PPP Loan (April 27, 2020)
The SBA issued a new FAQ #31 on April 23, 2020, which applies to existing borrowers, as well as those in the application process. The FAQ provides guidance on what it means to certify that: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Although we believe the issue described in FAQ #31 was directed at large companies (large was not defined), it could have implications for all loan recipients based on the broad “necessity” language found later in the FAQ. We are not trying to interpret this language at this time, but thought we should bring it to your attention.
For the full list of FAQs updated/published by the SBA on May 3, 2020, select this link
Question 31: Do businesses owned by large companies with adequate sources of liquidity to support the business’ ongoing operations qualify for a PPP loan?
Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application.
Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.
Lenders may rely on a borrower’s certification regarding the necessity of the loan request. Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
$310 Billion in New Funding for Paycheck Protection Program (April 26, 2020)
The latest coronavirus-related stimulus package has been signed into law, which will provide relief for more small businesses. In total the federal government is providing $310 billion for the Paycheck Protection Program, of which $60 billion is set aside for smaller lenders such as community banks and credit unions.
The SBA will begin accepting applications again on Monday, April 27, at 10:30 am.
According to SBA Website
Notice: Lapse in Appropriations (April 16, 2020)
The SBA is currently unable to accept new applications for the Paycheck Protection Program based on available appropriations funding.
To apply for the Paycheck Protection Program
Start preparing the following documents:
Please note: Several banks have their own version of the application form along with their own requirements regarding the information that they need to process the loan. The following document list is a suggestion of items to start compiling.
Document Checklist – Most banks are asking for this information to apply for the PPP loan:
2019 IRS Quarterly 940, 941 or 944 payroll tax reports
Payroll reports for a 12-month period (ending on your most recent payroll date), which will show the following information:
Gross wages for each employee, including officer(s) if paid W-2 wages
Paid time off for each employee
Vacation pay for each employee
Family medical leave pay for each employee
State and local taxes assessed on an employee’s compensation
1099s for Independent Contractors for 2019
Documentation showing total of all health insurance premiums paid by the company owner(s) under a group health plan.
Include all employees and the company owners
Document the sum of all retirement plan funding that was paid by the Company owner(s) (do not include funding that came from employees out of their paycheck deferrals).
Include all employees and the company owners
Include 401K plans, Simple IRA, SEP IRAs
Paycheck Protection Program Clarifications
The Treasury Department and the Small Business Administration
posted an 18-point FAQ
that addresses many key issues. Specifically, the FAQs makes the following clarifications:
• The Gross Payroll approach should be used for both loan application and forgiveness. The guidance also clarifies that employer FICA should not be included.
• The $100,000 salary limitation does not include healthcare, retirement benefits, and state and local taxes.
• Applicants who use Professional Employer Organizations (PEOs) can provide payroll reports since they cannot produce individual entity payroll tax documents.
• Borrowers can calculate their aggregate payroll costs using data either from calendar year 2019 or from the previous 12 months. The FAQs also provide information for businesses that have been in operation less than 12 months.
The AICPA also provided reccommendations to help employers prepare documents for the PPP Application Process.
More Guidance on Paycheck Protection Program (April 14, 2020)
The Small Business Administration released an additional Interim Final Rule this afternoon that provides guidance on a couple of key areas of uncertainty around the Paycheck Protection Program (PPP).
The new guidance discusses loan amounts and loan forgiveness calculations for individuals with self-employment income (with and without employees).
Additionally, the guidance clarifies that the self-employment income of general partners may be reported as a payroll cost, up to $100,000 annualized, on a PPP application filed by or on behalf of the partnership (and LLC filing taxes as a partnership).