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The Paycheck Protection Program has been a source of much-needed financing and working capital for companies. The Small Business Administration (SBA) recently reported they have approved 175,418 loans for a total of $12B issued to Texas businesses and 320,156 loans for a total of $33B issued to California businesses in the second round of CARES Act funding. Those are astounding numbers and reflect how crippling the COVID-19 emergency has been on many. However, while the loans are disbursed, new guidance and updates have caused stress. This includes the need for unqualified businesses to return loans by the safe harbor date and recent IRS guidance on the federal tax treatment of expenses included in PPP forgiveness. Unlike other government programs that have guidance and rules issued when a program is introduced, the PPP did not in order to allow for the immediate disbursement of funds. This has led to a roller coaster-like series of twists and turns, making it challenging to stay current. To help clients, prospects, and others stay updated, JLK Rosenberger has provided a summary of the latest below.
Loan Forgiveness Deductibility
When the PPP was created, it was to immediately help those businesses blindsided by COVID-19. The program was specifically designed to throw a life preserver to those in greatest need and help them meet payroll and other expenses. That is why many were surprised when the IRS unveiled a “gotcha” moment. On April 30, 2020, IRS Notice 2020-32 was issued, providing guidance on whether expenses incurred that led to loan forgiveness are deductible. Typically, a business is permitted to deduct payroll, rent, mortgage, and utility expenses. However, the Notice made a different interpretation. According to the IRS, no deduction is allowed for an expense that is otherwise deductible if the payment results in the forgiveness of a PPP loan.
Since very few enjoy these “gotcha” moments, many Congressmen were unhappy with the ruling and want it changed. Queue the Small Business Expense Protection Act, which was introduced to the Senate on May 5, 2020. The purpose of the legislation is to overturn the IRS ruling and allow expenses incurred through PPP loans and associated forgiveness to remain deductible. It is bi-partisan and expected to move through the Senate quickly for a vote and approval in the coming weeks.
Safe Harbor Guidance
There have also been many questions around the repayment of loans, including the safe harbor program and eligibility for related tax credits. In an effort to address these questions, Treasury recently updated its guidance to speak directly to these matters. Below are the highlights from the updated guidance.
- Automatic Safe Harbor – Borrowers receiving loans with an original principal amount of less than $2 million are automatically extended safe harbor. The SBA has determined that businesses below this threshold have less access to sources of liquidity in the current economic environment.
- Safe Harbor Extension – For borrowers with loans greater than $2 million, they will be subject to an SBA compliance review. In order to resolve potential issues arising from submitted loans that were not in “good faith,” the SBA created a safe harbor program. It allows companies to return the loan and maintain their good faith certification. There have been inquiries about whether a company could receive a deadline extension. The SBA indicated there will be an automatic seven-day extension, now May 18th, under which loan repayments can be made.
- Employee Retention Tax Credit Eligibility – Since a business that has received a loan through the PPP are ineligible to use this credit, there were questions about whether those who return loans by the May 18th deadline could then claim it. According to the SBA, the answer is yes because any business that returns a loan before the safe harbor deadline will be treated as though no loan was issued or accepted.
Much like a hot summer blockbuster movie, the news and updates around the PPP have kept many guessing and waiting for the next scene. We will continue to monitor the situation and provide updates on the most relevant information when it becomes available. If you have questions about the information outlined above or need assistance with a COVID-19 tax issue, JLK Rosenberger can help. For additional information, call us at 972-931-6803 or click here to contact us. We look forward to speaking with you soon.