Businesses are growing uncertain as to what the real benefits of the PPP loan program will be and whether the originally promised tax benefits of forgiveness will materialize for them. Adding to this uncertainty is the lack of clarity around the certification that many businesses have already made.

Recent developments and guidance from the U.S. Department of the Treasury and the IRS are adding to this uncertainty:

  • Loan Review – In recent weeks, the Treasury issued guidance suggesting that any PPP loans issued in excess of $2M would be subject to a complete review by the SBA in consultation with Treasury in the eventual forgiveness application process. Reviews of loans at lower amounts are also anticipated “as appropriate.”[1]
  • Access to Other Capital – Additionally, the Treasury’s guidance suggested that companies with access to other capital may not qualify for PPP loans. The guidance also added that borrowers must “certify in good faith that their PPP loan request is necessary.”[2]  This was contrary to specific language in the CARES Act which did not require such access to other sources of capital.
  • Expenses Not Deductible – Loan proceeds from the PPP are being used to fund payroll and other qualifying costs. Section 1106(i) of the CARES Act is explicit that forgiveness of PPP loan is excluded from gross income. However, the statute’s lack of specificity on the manner of this exclusion has led to the IRS issuing Notice 2020-32 making the related expenses which would normally be deductible, now non-deductible, effectively removing the tax-free element of the eventual PPP loan forgiveness. Additional legislation has been presented to correct this. A bill introduced on May 6, 2020, will effectively nullify IRS Notice 2020-32 and allow deductions for the expenses paid with a forgiven PPP loan.
  • New Detail to Forgiveness – Limited details have been made available as to how forgiveness of PPP loans will be computed. However, a new detail emerged this week: Since one of the primary purposes of the PPP is to promote ongoing employment for American workers, PPP loan forgiveness requires employers to retain the same number of full-time equivalent employees (FTEs) on the payroll. To avoid a percentage reduction in loan forgiveness, employers need to have the same or higher average number of FTEs during the eight-week period following PPP loan disbursement as they had on average during either of two measuring periods: (1) February 15, 2019 to June 30, 2019 or (2) January 1, 2020 to February 29, 2020. Businesses can use PPP loan funds to rehire laid-off employees to meet the employment requirement for loan forgiveness.[3]

[1] FAQ question #39

[2] FAQ questions #31 and #37

[3] FAQ question #40

As Treasury and the SBA search for the solution to who they want the ultimate beneficiaries of PPP loan forgiveness to be, managing one’s business presents many challenges that need answers today.

  • Should a borrower return the money? – Treasury and the SBA have offered a window for entities who borrowed under the program but may not meet (or want) the scrutiny outlined above, to return the cash free of any sanctions by the SBA or Treasury for obtaining the loan under otherwise to-be-determined false pretenses. Whether to do so is a case by case decision. The timing for returning the cash was originally May 7, 2020 but has now been extended to May 14, 2020.[1]
  • Certification – Those who have received proceeds have already made their certifications as to their need for the loans. Businesses should consider contemporaneous documentation supporting and evidencing their economic condition at the date of their certification so as to be able to support that their PPP loan was necessary given their own uncertain business conditions.
  • Rehiring Documentation – Businesses may have former employees who reject reemployment offers. That fact does not count against the employer in meeting the average number of retained full-time employees test to qualify for full PPP loan forgiveness. The employer should keep two pieces of documentation: (1) a good-faith written offer to the employee offering the same salary/wage and number of hours as before the layoff and (2) written rejection of the offer.[2]

For more answers, read these frequently asked questions provided by the SBA and Dept. of Treasury.

[1] FAQ question #43

[2] FAQ question #40

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.