It has been a busy week in Washington and we want to keep you apprised of several updates regarding the Paycheck Protection Program (PPP). Our team is available to answer any questions pertaining to the information noted below or any other matters pertaining to recent stimulus legislation.

Expense Deductibility

The IRS published guidance yesterday regarding the deductibility of expenses paid for with PPP loan funds and for which loan forgiveness is granted. The treatment of such expenses was not clarified under the CARES Act, which left employers unclear about whether they would receive a tax deduction for these expenses. The IRS ruling clarified that no deduction will be allowed for expenses that result in forgiveness under the PPP. The IRS cited Code Section 265, which prohibits a deduction for expenses attributable to nontaxable income.

We strongly encourage companies that obtained PPP loans to consider this guidance and whether it changes their plans for how to use their PPP loan proceeds. This guidance reduces the benefit from this program, in some cases materially, and could alter job retention decisions being made by employers.

Please note the following article from the Wall Street Journal, which provides further explanation about the impact of this decision. While there are indications that Congress may act in order to reform this guidance, there are no expectations of timing for such actions.

Borrower Certification

In our recent communication, we provided updated guidance issued by the U.S. Treasury regarding borrower certifications made by recipients of PPP loans. Borrowers made good faith certifications “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” The updated guidance further clarified that “borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”

Additionally, an updated FAQ was issued this week that answers whether the Small Business Administration (SBA) will review individual PPP loan files for compliance purposes. The SBA has indicated that they “will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application.”

We encourage PPP loan recipients to consider their certification and whether any changes have occurred that require consideration for returning the loan proceeds. Specifically, consider whether your circumstances fall within the spirit and intent of this economic relief program.  If you did receive and decide to keep PPP funding, it is critical that you maintain complete and accurate documentation to support your eligibility for such funding, the specific use of these funds, as well as your qualifications for forgiveness under the terms of the program. Any business that received a PPP loan prior to the issuance of this new guidance and who now believes that they do NOT demonstrate the necessity for the loan, can repay the loan in full by May 7, 2020.  Any business that does so will be deemed by the SBA to have made the required good faith certification on their PPP loan application.

Loan Forgiveness

Many of our clients have applied and been approved for PPP loans since the SBA launched this program through authorization under the CARES Act. In most cases, these clients have also received their PPP loan funds and begun using the proceeds to retain jobs – which is the laudable intent of the Program. The next important step is documentation of eligible expenses incurred and paid for with PPP loan proceeds. Please note that the U.S. Treasury has not provided official guidance regarding loan forgiveness, but we expect such guidance to be issued at some point due to pressure from the public.

We encourage loan recipients to track all eligible expenses incurred under the Program in a comprehensive schedule, along with electronic copies of all supporting documentation. Suggested documentation includes (but is not limited to):

·     Payroll reports for the covered periods of the loan as well as for periods used to support loan forgiveness
·     Proof of health insurance contributions during the covered period
·     Proof of retirement contributions during the covered period
·     Proof of payments for following expenses during the covered period:
·     Rent
·     Business mortgage interest payments on real or personal property
·     Utility payments

For organizations that will be applying for loan forgiveness, a detailed schedule (along with supporting documentation) will be needed to substantiate that loan proceeds were used for eligible expenses. Further tests will be applied to eligible expenses to determine ultimate loan forgiveness, including the percentage of loan funds used for payroll costs, an employee retention ratio, and employee compensation reductions.
RS&F is able to assist clients to determine loan forgiveness. We have developed a model for this purpose that will both track eligible expenses as well as project loan forgiveness. Please contact your RS&F Advisor to obtain this schedule and for assistance with PPP loan forgiveness.