In an effort to keep you up to date on the most recent Small Business Administration and Treasury guidance related to the Paycheck Protection Program (PPP) we wanted to share the following clarifications:
Eligibility, Certification and Necessity of Payroll Protection Program Loans
There has been much press related to public companies securing PPP loans. Although, it appears they did meet the initial requirements of application, the Treasury and SBA have clarified these companies were not the intended recipients of the PPP assistance. In an attempt to address questions from applicants, prospective applicants, and those that have already received loans, the Treasury continues to issue FAQs and additional guidance to assist businesses in determining their eligibility.
The application requires the owner certify “Current economic uncertainty makes the loan request necessary to support the ongoing operations of the Applicant.” Treasury clarification indicates the applicant should take into account the current business activity and the ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The Treasury has indicated recipients should return loan proceeds by May 7th, if they do not meet the eligibility requirements.
We recommend that recipients document the conditions that support their assertions now and maintain that document in a permanent file. Consideration should be given to the impact on your specific industry; the objectives of the CARES Act; both operating and non-operating capital requirements to maintain operations; access to capital and an operational plan.
Income Tax Impact of Loan Proceeds and Expenses Paid with Loan Proceeds
The IRS issued Notice 2020-32 clarifying the income tax treatment of both the forgivable loan proceeds and the expenses paid with those proceeds. The Notice is in line with our expectations. The forgivable amount of the loan proceeds will not be treated as taxable income. However, in line with other IRS code sections, the expenses paid with these tax-exempt funds will not be allowed as a tax deduction. The amounts paid for payroll, rent, utilities, and eligible mortgage interest during the 8-week covered period, and then ultimately forgiven with not be included in as deductible expenses on your 2020 tax return. If these expenses were deductible, it would be a “double bonus” for the taxpayer.
If forgiven, the PPP loan proceeds result in a tax-free grant allowing small businesses to cover payroll and certain eligible overhead expenses during this time of decreased cash flow and uncertainty.
We encourage you to manage and monitor eligible expenses during your 8 week covered period. Planning now removes the element of surprise when applying for forgiveness and allows you to properly document and be strategic to ensure all eligible expenses are included.
We are happy to assist with this process by preparing a tentative forgiveness calculation and then following up with a 90 minute strategy session to develop a plan to fit your unique set of circumstances. If you would like our assistance, please use the link below to provide us specific details regarding your eligible expenses. We will reach out to schedule a conference call to further refine your plan.
- Use the link above to provide Somerset SBA team with the required information to complete your initial analysis. It is important that you provide/complete all information requested.
- We will call to setup a meeting to review and be strategic to maximizing loan forgiveness. This needs to be done soon to put in place any changes that may be necessary.
- Managing the costs incurred during the 8 week period to align with the plan.
- Reporting costs incurred to obtain loan forgiveness.