PPP Update #7 – What’s New? – Clarity on Deductibility of Expenses & Other Items

Posted on Fri, May 01, 2020 ©2020 Drucker & Scaccetti

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As guidance in this area is being released regularly, we recommend you read all of our blogs on this subject.  All the blogs in the Paycheck Protection Program series are here: Updates #1, #2#3#4#5#6#7, #8, #9, #10

 

 

While many await formal guidance about the Paycheck Protection Program (PPP) loan forgiveness, the SBA and Treasury were busy issuing various other guidance this week.  Today, we outline and provide our thoughts about this week’s guidance, including deductibility of expenses paid with PPP funds and PPP eligibility standards.

 

IRS Issues Guidance on Deductibility of Expenses Paid with PPP Funds

On April 30th, the IRS issued Notice 2020-32.  The Notice addresses the deductibility, for federal income tax purposes, of expenses paid by a business with PPP funds.  The Notice confirms expenses paid with PPP funds eventually forgiven are NOT deductible.  This follows the forgiveness of the PPP loan not being taxable; a consistency required to prevent taxpayers from receiving a double-tax benefit prevented by well-established tax principles and precedent under Internal Revenue Code (IRC) Section 265.

 

Many hoped, based upon the implied intent of the law, that borrowers could receive tax-free income via the loan forgiveness and continue to deduct the associated expenses.  At the end of the day, the Notice provides an equitable result where expenses funded with government dollars will not be deductible.  Regardless, the PPP loans remain a valuable tool to assist businesses in continuing operations during this unprecedented time.

 

If you received PPP funds and used them to pay eligible expenses, you should be keeping detailed contemporaneous records to assist with applying for loan forgiveness as well as preparing your 2020 tax returns. 

 

Updates on Eligibility

Recall from our last blog that Treasury issued new guidance regarding eligibility for the PPP loans.  A review of FAQ #31 and the 4th interim final rule left many confused regarding whether the safe harbor to repay the PPP funds, including the associated guidelines to determine adequate resources, applied only to large public companies or to everyone.

 

On Tuesday, April 28th, Treasury issued FAQ #37 confirming the rules applied equally to public and private companies.  The same day, Treasury and SBA issued a joint statement indicating all loans over $2 million will be reviewed and left the door open to review loans of lesser amounts.

 

Given the May 7, 2020, deadline to repay any loan obtained based upon a misunderstanding or misapplication of the required certification standard, you should work with your advisory team to establish contemporaneous documentation, such as in internal memorandum, supporting the basis of why the loan was necessary to support ongoing operations.  Doing so prior to the May 7, 2020, deadline provides an opportunity to return PPP loan funds, if determined necessary.

 

Treasury Issues Unofficial Guidance on How to Calculate Loan Amounts

On April 24th, Treasury issued unofficial guidance regarding how to calculate the maximum loan amount based upon an applicant’s business type.  This unofficial guidance was welcome news for partnership applicants as it was the first time any guidance, formal or unofficial, addressed how to calculate the maximum loan amount.

 

For all business types, the guidance calculates the maximum loan amount using calendar year 2019 information.  Recall that the law specifically states data from the previous 12 months is used and that FAQ #14 provided the option of either the previous 12 months or calendar year 2019.  Work with your lender and advisory team to determine the best period to utilize to determine your maximum loan amount.  The guidance also addresses the documentation required for applicants using calendar year 2019.

 

5th Interim Final Rule – Seasonal Employers

Issued on April 28th, the 5th interim final rule provides relief for seasonal employers by expanding the periods available to calculate the maximum loan amount.  A seasonal employer may choose any 12-week period between 5/1/2019 and 9/15/2019 to determine their maximum loan amount.

 

This is welcome news for seasonal employers with summer seasonal businesses as the original rules unintentionally favored winter/spring seasonal businesses.

 

6th Interim Final Rule – Timing of Loan Disbursements & Commencement of 8-Week Period

Issued April 28th, the 6th interim final rule confirms the 10-calendar day requirement for a lender to disburse funds upon loan approval.  This interim final rule also provides:

 

  1. A loan is “approved” when the SBA number is assigned.

 

  1. A borrower has 20 calendar days from loan approval to submit all required documentation or the loan is cancelled.

 

  1. If the 10th calendar day falls on a weekend or holiday, the day is moved to the end of the next business day.

 

  1. Full loan disbursement is required; a loan cannot be disbursed in increments.

 

  1. For loans issued before 4/28/2020 and not yet disbursed, the 10-day requirement begins on 4/28/2020 and the 8-week period for tracking forgivable expenses begins upon disbursement.

 

We will continue providing updates when relevant information becomes available.  If you have questions about how to navigate the PPP loan application process, or how other CARES Act incentives may apply to your business, please call on us.  You can stay up to date on PPP guidance and tax issues relating to the coronavirus at our COVID-19 Tax Resource Center.

Topics: IRS Notice, IRS Guidance, CARES Act, loan forgiveness, Small Business Administration, Payroll Protection Loans, Notice 2020-23, Paycheck Protection Program Loans, PPP Loan, Carryforwards, Carrybacks, Eligibility, Clarity, Deductibility of Expenses, Interim Final Rule, SBA

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