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PPP Loans – Disallowance of Expense Deductions: Withum is getting a lot of questions regarding the denial of tax deductions relating to PPP loan forgiveness. As you may recall, cancellation of debt relating to the PPP loan is not taxable income. While that is the case for the loan itself, the amount forgiven actually ends up being fully taxable because the IRS issued Notice 2020-32 to disallow the tax deductions (expenses) that gave rise to the loan forgiveness. Here is a link to a Withum article on the Taxation of PPP Loans and Loan Forgiveness. Thus, taxpayers should expect more taxable income as they will have less deductible expenses in 2020 than are reflected on their internal books and records.

This also has caused some fiscal year-end borrowers to consider whether they can choose which deductions to disallow so they can defer the taxation of the loan forgiveness amount until a later tax year. 

Consider this example: a borrower obtained a PPP loan 8 weeks before the end of its 2020 FYE. If it obtains loan forgiveness based on the first 8 weeks of covered expenses, then those expenses would be disallowed and the loan forgiveness amount would be taxable in 2020. If, however, the borrower can disregard the first 8 weeks of expenses and rely only on the last 16 weeks of covered expenses paid or incurred during the covered period, then it could defer the expense disallowance, and therefore the taxation of the loan forgiveness amount until 2021. There is no guidance on this issue from the IRS or from the SBA, and while there are reasonable arguments to be made both ways, we cannot recommend borrowers take this position because eligibility for loan forgiveness is based on “the sum of” the covered expenses paid and incurred during the covered period, according to section 1106(b) of the CARES Act.

Could Deductibility of PPP Expenses Change?  Many have speculated that denying tax deductions for PPP loan recipients was not the intent of the program.  Several members of Congress have indicated that they intend to pursue legislation that would allow for all PPP related expenses to be deductible in order to avoid having small businesses deal with an unexpected tax bill after such a difficult year.  Even though at least one bill to restore the deductions has been proposed, at this point no agreement has been reached, so taxpayers need to proceed assuming that no change is coming.  That said, it is possible that we could see this addressed in an upcoming stimulus bill ….stay tuned.

Reminder Section:  (what should I be doing):

• Talk to your lender to find out when its PPP loan forgiveness application portal will be ready.
• Talk to your payroll company about claiming the employer payroll tax deferral and employee retention credits (ERC) that were made available in the CARES Act.
• Talk to your payroll company about claiming the qualified sick/family leave refundable tax credits (from FFCRA, passed prior to the CARES Act).

MCAA’s GreatFutures Virtual Fall Program has kicked off! Each of the 17 presentations is meant to help students navigate the proposal and bid process for the annual MCAA Student Chapter Competition project.  

Did we mention registration is free and you only have to register once for ALL of the presentations!

Once registered, you will receive a confirmation email with the MCAA’s GreatFutures Virtual Fall Program website login instructions. This website includes:

• All virtual program details;
• Presentation descriptions;
• Speaker overviews; and 
• A full agenda with links to join the live sessions!

We encourage you to attend as many presentations live to interact with fellow students and engage with the presenters in the presentation Q&A. If you are unable to attend any of the sessions live, don’t you worry, the recorded presentations will be posted on MCAA’s GreatFutures Virtual Fall Program website AFTER the live session.

MCAA is sending a weekly Monday reminder email to registered attendees, highlighting the presentations for that week. Don’t forget to add them to your calendar!

REGISTER NOW

As many buildings are preparing to reopen during this pandemic, the ASHRAE Epidemic Task Force has updated its reopening “Building Readiness” guidance for HVAC systems to help mitigate the transmission of SARS-CoV-2. Specific updated recommendations to the building readiness guidance include the following: Pre- and Post- Flushing Strategy, Energy Recovery Ventilation (ERV) Systems Operation, and Building Readiness Modes of Operation for the Building.

Alston & Bird have released their August 17 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Final PPP Statistics:  As many of you know the PPP loan program is officially closed, it is certainly possible that it can be extended via the next stimulus bill, however that has been delayed and it is unclear what changes to the PPP (if any) will come as a result of the bill and when. The SBA has been consistently publishing PPP loan statistics, and this link provides what is effectively the “final” results as we know them. Some general observations:

• $133 billion of funds allocated to the program went unused.
• NY, CA and TX were the largest recipients of loans.
• Over 87% of the total loans issued were below $150k.
• Chase, BOA and PNC were the top three lenders (by dollars).
• Healthcare, professional services and tech were the top three beneficiaries (by dollars).

New Clarifications/FAQs on How to Calculate Forgiveness: The SBA released new FAQs recently, Withum has written an in-depth analysis on each one within this article. The FAQs do not present major shifts in how we view the mechanics of forgiveness but do help provide further detail and clarity on topics such as how to calculate the maximum forgivable salary for owner/employees based on entity type (LLC, S-Corp, C-Corp and how to account for benefits paid within and outside of the covered period among other topics. As borrowers begin working on their applications, understanding these nuances is important. 

PPP and M&A: Withum often gets questions regarding how the sale or a business or the acquisition of another entity may impact a borrowers PPP loan and ability to obtain forgiveness. Withum has put together an article addressing some of the complexity that may arise from these transactions, as well as how they impact the employee retention tax credit.

Reminder Section:  (what should I be doing):

• Talk to your payroll company about claiming the employer payroll tax deferral and employee retention credits (ERC) that were made available in the CARES Act.
• Talk to your payroll company about claiming the qualified sick/family leave refundable tax credits (from FFCRA, passed prior to the CARES Act).
• Consider speaking with your lender to discuss changes to terms of existing debt facilities.
• If you have already received a PPP loan, start forecasting how you intend to spend the funds and how you can qualify for the highest amount of loan forgiveness possible. If you are not forecasting 100% loan forgiveness, then most likely you should seek assistance regarding your particular situation. Withum believes the vast majority of borrowers should expect and plan to receive 100% loan forgiveness.

On August 4, 2020, the Small Business Administration (SBA), in conjunction with the Treasury Department, released 23 frequently asked questions (FAQs) regarding loan forgiveness under the Paycheck Protection Program (PPP).

The FAQs, released approximately one week ahead of the SBA’s opening its loan forgiveness application portal, covers general questions surrounding the process and the type and amount of costs that can be included in the loan forgiveness application. Some of the FAQs confirm previously-stated positions and represent logical extensions of prior guidance, and others contradict prior guidance.

This article focuses on the most salient points of the FAQs and highlights the departures from prior SBA guidance or prevailing interpretations.

General Loan Forgiveness FAQs

• Sole proprietors, independent contractors and self-employed individuals with no employees can use the EZ loan application.
• Borrowers are not required to make loan payments prior to their receipt of a decision on their loan forgiveness application, provided they the application is filed within 10 months of receipt of the loan. Interest accrues from the date of receipt of the loan, but only on the part of the loan that is not forgiven.

Payroll Cost FAQs

• There is no change to the paid or incurred rule as applied to payroll costs.
  • Paid – payroll costs that are incurred prior to a borrower’s covered period (CP) but paid during the CP are includable.
  • Incurred – payroll costs that are incurred during the CP but paid on or before the next regular payroll date after the end of the CP are includable.
• Cash compensation is determined using gross payroll amounts. For purposes of the $100,000 annualized limitation on cash compensation, all forms of cash compensation should be considered, including wages, tips, commissions, bonuses and hazard pay.
• Employee group health care costs are includible to the extent paid by the employer during the CP for coverage during the CP, but not for coverage outside the CP. This narrowing of the “paid” rule contradicts prior SBA guidance and creates a difference in the treatment between cash compensation and employee group health care costs.
• No forgiveness will be provided for retirement benefits accelerated from periods outside the CP. This too represents a narrowing of the “paid” rule and contradicts prior SBA guidance.
• The FAQs confirmed prior guidance that the maximum owner compensation amount for a 24-week CP is $20,833 in total across all businesses, but it added that borrowers are free to choose how to allocate such amount among their businesses.
• Changes were made to the calculation of the owner compensation limits by business type. Below are the new rules.
  • C Corporations: cash compensation relating to a C corporation’s shareholder/employees is limited to 2.5 months of their 2019 cash compensation (for a 24-week CP), subject to a cap of $20,833. The corporation also is eligible for forgiveness on its group health care costs, state/local employment taxes, and retirement contributions capped at 2.5 months of the 2019 retirement contribution amounts.
  • S Corporations: cash compensation relating to an S corporation’s shareholders/employees is limited to 2.5 months of their 2019 cash compensation (for a 24-week CP), subject to a cap of $20,833. The corporation also is eligible for forgiveness on its state/local employment taxes, retirement contributions capped at 2.5 months of the 2019 retirement contribution amount, and health care contributions for owners owning less than 2% of the stock of the S corporation (or family members of such owners). Group health care costs are not eligible for forgiveness for owners or for family members of owners holding at least 2% of the S corporation’s stock.
  • Self-Employed Schedule C (or Schedule F) Filers: forgiveness is capped at 2.5 months of 2019 net profit as reported on Schedule C, line 31. No forgiveness may be obtained for group health care costs, retirement contributions, or state/local employment taxes.
  • General Partners: forgiveness is capped at 2.5 months of 2019 net earnings from self-employment (on Schedule K-1, box 14a) multiplied by .9235, and payment of this amount must be made during the CP. No forgiveness may be obtained for group health care costs, retirement contributions, or state/local employment taxes. The partners’ 2019 Schedules K-1 must be submitted along with the partnership’s loan forgiveness application.

If you have any questions regarding the loan forgiveness process, please contact a member of Withum’s SBA Financial Assistance Services Group.

Nonpayroll Cost FAQs

• There is no change to the paid or incurred rule as applied to nonpayroll (i.e., overhead) costs.
• No change to the definition of a covered mortgage in the CARES Act, but the FAQs state that interest on an unsecured line of credit is not eligible for forgiveness because the loan is not secured by real or personal property.
• The renewal of a lease that was in place prior to February 15, 2020, will not affect loan forgiveness for the rental payments on such renewed lease.
• Additional color is provided to the previous guidance that “transportation” expenses include gasoline for a borrower’s vehicle. The FAQs provide that “transportation” expenses include transportation utility fees assessed by state and local government.

Headcount and Wage Reduction FAQs

• The SBA previously announced a safe harbor with regard to headcount reductions where the employer made an offer of reemployment that was rejected by an employee. The FAQs add that borrowers must demonstrate both an inability to hire similarly-qualified individuals on or before December 31, 2020, and that they informed the relevant state unemployment office of the offer within 30 days of the employee’s rejection of the offer.
• With regard to salary/wage reductions, the FAQs reiterate that the borrower should only take into consideration decreases in salaries and wages, and not additional compensation such as bonuses, commissions, etc.

The FAQs provide additional guidance for borrowers, but hopefully Congress acts to further limit the loan forgiveness process either by eliminating the requirement to apply for certain loan sizes or by further streamlining the application process. Unless it does, the SBA plans to open its loan forgiveness application portal in the next few days. To the extent borrowers are left to make reasonable assumptions about the operative rules, we continue to encourage full disclosure as part of the loan forgiveness application process.

Alston & Bird have released their August 10 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Alston & Bird have released their August 3 COVID-19 update, including the latest news on emergency funding, administrative and regulatory actions, workplace and home issues, and many other topics, as well as to links to all their past updates.

Second Round of PPP Loans:  There has been a lot of news swirling online that new legislation will open the door for borrowers to get a second PPP loan.  Also there is more chatter that automatic forgiveness for certain loans is on the horizon. It appears as though early August may be the target for new legislation if it comes. Details on this are fluid to say the least, but it looks like both Republicans and Democrats are on the same page that the PPP is an effective tool that they want to use as part of upcoming stimulus programs.

SBA Issues Procedural Notice on Forgiveness Process:  The SBA released a notice that provides clarification to lenders on how they should submit applications to the SBA for “final approval” after the lender has reviewed and approved a borrower’s forgiveness application. The highlight in this document is that the SBA indicated it will be using a third party software vendor to develop its portal, which will not be up and running until August 10^th, so lenders will need to hold any applications until that time.  

The SBA further clarified that it may delay the opening of its portal further if any new legislation impacts the forgiveness process.  Withum has long believed Congress or the SBA would choose a loan threshold (e.g., loans of $250,000 or less) and grant “automatic” forgiveness to those borrowers, requiring only a signed certification that the funds were used properly. This would drastically reduce the amount of applications that the SBA and lenders would need to review. 

Withum does not have any official guidance or information on the legislative proposals reported in the press in past day or two (as noted above), but they think it may be prudent to wait to submit your application to your lender until a legislative consensus emerges. As a reminder, lenders have 60 days to process your loan forgiveness application and submit their decision to the SBA, and the SBA has 90 days to authorize the forgiveness amount.

PPP and M&A:  Withum often gets questions regarding how the sale of a business or the acquisition of another entity may impact a borrowers PPP loan and ability to obtain forgiveness. Withum put together an article addressing some of the complexity that may arise from these transactions, as well as how they impact the employee retention tax credit.

Reminder Section:  (what should I be doing):

• Talk to your payroll company about claiming the employer payroll tax deferral and employee retention credits (ERC) that were made available in the CARES Act.
• Talk to your payroll company about claiming the qualified sick/family leave refundable tax credits (from FFCRA, passed prior to the CARES Act).
• Consider speaking with your lender to discuss changes to terms of existing debt facilities.
• If you have already received a PPP loan, start forecasting how you intend to spend the funds and how you can qualify for the highest amount of loan forgiveness possible.  If you are not forecasting 100% loan forgiveness, then most likely you should seek assistance regarding your particular situation.  Withum believes the vast majority of borrowers should expect and plan to receive 100% loan forgiveness.