Recent Developments Regarding the Paycheck Protection Program (PPP)
Updated on May 4, 2020 at 1:00 P.m.
There have been two recent developments regarding the Paycheck Protection Program (PPP) that may impact your company and its view of obtaining a PPP loan.
First, on April 30, the IRS issued notice 2020-32 to address the question of deductibility of any expenses used to determine the forgiveness calculation of loans received under the Paycheck Protection Program (PPP). Congress specifically stated in passage of the Paycheck Protection Program that any forgiveness of debt under this program will not be considered taxable income, as it typically would have been under the Internal Revenue Code. Congress did not address if any deductions used to determine the forgiveness amount of the PPP loan would still be allowed as deductions for income tax determination purposes. IRS notice 2020-32 states that no deduction will be allowed for any expenses that result in forgiveness of loan amounts under PPP. While the notice is not law, it does indicate how the IRS will approach the situation.
The notice decreases the economic benefit of PPP loan forgiveness and seems contrary to the intent that Congress had for the legislation. Absent Congressional action, businesses will need to comply to the ruling in the notice and thus will need to plan for their taxable income to be increased by the amount of deductions that result in forgiveness under PPP.
For example, if a total of $100,000 expenses were used for PPP loan forgiveness and you are in a 30% income tax bracket then the benefit of the forgiveness is reduced by $30,000 ($100,000 x 30%).
It is likely there will be a great deal of pressure on Congress to remedy this situation. If and when that will happen, is unknown at this time.
Second, there has been a great deal of commentary regarding certain public companies that received PPP loans. Several have decided to return their funds as a response to the public’s reaction. Another effect of this is it has increased the spotlight on all recipients of PPP loans. Treasury recently issued additional guidance stating all PPP loans of greater than $2 million will be subject to a full review by SBA prior to any forgiveness is granted. Additionally, the guidance states SBA will also review “other loans as appropriate.” Further guidance is forthcoming, but the current atmosphere surrounding the Paycheck Protection Program seems to be focused on increased scrutiny of borrowers. It is likely all PPP loan recipients will become public. The guidance provides a safe harbor for any company that received funds and has now determined they do not want to participate in the program to return funds by May 7, 2020. If done, they will have been deemed to have made all loan certification on the original application in good faith.
It is more important than ever that any organization that uses PPP funds have complete and accurate records showing their eligibility for funds, how the funds were used, and qualification for any forgiveness.
Please contact MHCS to discuss your specific situation.