Paycheck Protection Program Updates
We draw your attention to a couple recent developments regarding Paycheck Protection Program (PPP) Loans:
On Friday, the U.S. Small Business Administration (SBA) released its application and instructions for Paycheck Protection Program (PPP) borrowers to apply for loan forgiveness. Click here to view the application, which includes a worksheet detailing the costs eligible for forgiveness as well as the form for calculating the amount of the loan that can be forgiven. The SBA also provided a list of documents that borrowers will have to submit with their forgiveness applications. In addition, the SBA announced that it would soon issue regulations and guidance to further assist borrowers as they complete their applications.
Taxation of Expenses Paid with PPP Loans
The Internal Revenue Service has issued IRS Notice 2020-32 which states that no deduction is allowed for an expense that is otherwise deductible, when the expense was paid with funds from a forgiven loan under the CARES Act. Therefore, if you received a PPP loan that is forgiven, expenses paid with those funds are not deductible for tax purposes.
The United States Treasury issued Frequently Asked Questions on PPP loans.
Qualifying for PPP Loans
FAQ 31 provided guidance on qualifying for PPP loans and states, in part, “All borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. … Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “current 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 sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.”
FAQ 31 further states, “Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 14, 2020 will be deemed by SBA to have made the required certification in good faith.”
Safe Harbor for good-faith certification
FAQ 46 states, in part, SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.
Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.