PPP Loan Updates: IRS to Tax Loan Forgiveness and SBA Announces Scrutiny Measures
The following message was sent out to clients and friends of the firm this morning.
As a firm, we hope that you are all staying healthy and as productive as possible during this challenging time. We know that there are difficult decisions to be made amid hope that a gradual return to normal is looming on the horizon, so we wanted to provide you with a general update. We constantly update our website and resources walzgroupcpa.com/news/, but we wanted to update you on some specific issues.
PPP Taxability
The CARES Act specifically indicates that any amount of the loan that is forgiven should not be included in taxable income. However, on Thursday, the IRS issued a ruling that indicated that the expenses that lead to that forgiveness will not be deductible. Unfortunately, taxable income and nondeductible expenses result in essentially the same outcome. Absent an intercession by Congress (or eventually the courts), the ruling as of now by the IRS is that, for all intents and purposes, the amount of the loan that is forgiven will be added to net taxable income for any for-profit entity. The details are available at irs.gov/pub/irs-drop. This interpretation is certainly relevant to consider and may influence your approach to spending the funds. Don’t hesitate to contact us to discuss.
PPP Scrutiny
As it came to light that numerous public companies and at least one professional sports franchise were able to secure PPP loans, public outcry resulted in not only those organizations returning the funds but also the Treasury Dept. to issue some additional guidelines in terms of loan qualification. In the FAQs (home.treasury.gov/Paycheck-Protection-Program-FAQs.pdf), the Treasury indicates through Question 31 that:
“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. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary.”
The Treasury continues:
“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.”
The FAQs also say, when considering Question 37, that this guidance is not just for public companies. Two additional comments within the FAQs that may be applicable are that companies with large market value and source of liquidity may need to provide basis supporting the necessity of a PPP loan. Furthermore, any entity that returns the loan in full by May 7, 2020 will not be subject to the above scrutiny.
Subsequent to the issuance of this guidance, Secretary Mnuchin indicated that all loans of greater than $2 million would be subject to audit. He did not indicate how or when this audit would be conducted, but organizations that received loans of $2,000,000 or more should expect greater scrutiny as they apply for forgiveness. Question 39 on the FAQs addresses this in more detail, indicates that the review of the loan will be done following the forgiveness application and promises additional guidance. Also, it is possible that recipients of PPP loans become subject to public disclosure since they are recipients of public/federal funds.
Second Round of PPP Funding
If you were not able to get through in the first round of funding for the Paycheck Protection Program, the second round is open and the SBA has been accepting applications this week. The general consensus is that the $310 billion of funds available in this window will last an even shorter period than the first round of $349 billion did.
PPP Forgiveness
As yet, there has been limited clarification on the forgiveness aspect of the PPP loans. The Treasury Department has a CARES Act landing page that is updated as new guidance comes out and is a valuable resource. We encourage you to bookmark this page, paying specific attention to the Frequently Asked Questions, which have been updated multiple times per week, and the listing of interim final rules. The link to the Treasury landing page is: home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
Additionally, there have been many industry advocacy groups who have reached out to the Treasury and SBA regarding the need for additional guidelines for forgiveness. As the 8-week clock continues to tick for anyone who has already received funding, further guidance becomes more and more valuable. The American Institute of CPAs has sent their recommendations to the SBA and can be found here: journalofaccountancy.com/ppp-loan-forgiveness-aicpa
Many of you attended our webinar on April 14, and we got a number of questions during that presentation. Here is our list of questions and answers to that session, which gives you a sense for where we are leaning on various items as well as the topics that are as yet unresolved.
Additional Resources
The firm is currently planning to provide additional tools if and when sufficient guidance is issued by the Treasury and SBA. This may include an additional webinar, updated spreadsheets for calculating forgiveness, and revised talking points and Q&As as needed. So, please stay tuned as we continue to keep you apprised of the changing landscape.
Thank you all for allowing us the ability to serve you through this time. We are hopeful that you are all able to overcome the current challenges, and we encourage you to continue to reach out to us as you have needs and questions.
