The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) provided much needed financial and tax relief to businesses and individuals affected by the novel coronavirus. The historic legislation included the Paycheck Protection Program (PPP) loans designed to assist small businesses in paying their employees during the COVID-19 pandemic. Since the passing of the CARES Act, the Small Business Administration (SBA) and Treasury Department have released numerous guidelines and resources to explain the many provisions of the CARES Act and help taxpayers and businesses navigate the massive legislation.

Additional information and guidance related to the Paycheck Protection Program was recently PPP Program Updates GBMreleased. Read below for additional details.

Additional Funding Allocated

An additional round of funding has been allocated for PPP loans. The new law signed by President Trump, authorizes an additional $310 billion to the Paycheck Protection Program, $50 billion to the Economic Injury Disaster Loan (EIDL) program and $10 billion for EIDL grants.

Certification of Need

The SBA published a Frequently Asked Questions document (FAQs) initially on April 3, 2020 and continues to update the document on a regular basis. One area of concern and uncertainty for many businesses receiving a PPP loan is whether they qualified for a loan in the first place.

FAQ 31 was published on April 23, 2020 and addresses the question of eligibility of businesses owned by large companies with adequate sources of liquidity to qualify for a PPP loan. Although FAQ 31 was directed towards large companies with adequate sources of liquidity, it is important to note that all PPP loan recipients, regardless of size, must certify on their PPP application that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant. Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficiently to support their ongoing operations in a manner that is not significantly detrimental to the business”. FAQ 31 also indicates that “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.” Unfortunately, specific guidance was not issued by the SBA regarding how it would determine if a business has access to other sources of liquidity.

As the May 7, 2020 deadline for returning loan proceeds is quickly approaching, and given this revised guidance from the SBA, if your organization has received a PPP loan, you are encouraged to review your company’s financial situation and whether your specific circumstances warranted receipt of PPP loan proceeds given the spirit and intent of the program. Legal counsel should be consulted if you have questions or concerns regarding your organization’s eligibility to receive the PPP loan.

For those organizations that have received and kept PPP loan funds, it is of upmost importance that you maintain
thorough and accurate documentation to support:

  1. eligibility for the loan,
  2. how funds were used for covered expenses, and
  3. qualifications for forgiveness.

Reliable and contemporaneous documentation is crucial to support your organization’s position for eligibility for the loan and ultimate forgiveness if audited and/or investigated.

Deductibility of Expenses Paid for With Payroll Protection Program Loan Proceeds

On April 30, 2020, the Internal Revenue Service issued Notice 2020-32 providing guidance regarding the deductibility, for Federal tax purposes, of expenses paid with forgiven PPP loans. Loan proceeds used for covered expenses during the 8-week period following receipt of the funds are eligible for forgiveness in full if certain employee count and wages levels are maintained. The CARES Act did not, however, indicate whether covered expenses paid using PPP loan funds that were ultimately forgiven would be deductible for Federal income tax purposes.

Notice 2020-32 clarifies that a Federal tax deduction is not allowed under the Internal Revenue Code for any expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the CARES Act. In other words, while proceeds from PPP loans are not taxable under the Internal Revenue Code, the expenses paid with loan proceeds are not tax-deductible to the extent of forgiveness of the loan. For any covered expenses paid with PPP loan proceeds that are ultimately not forgiven, the appropriate Federal tax deduction may be claimed to the extent otherwise allowed.

Contact the professionals at Gilliam Bell Moser if you have any questions.