I’ll cover the following topics: 1) Paycheck Protection Program Summary 2) Current Program Overview 3) Eligibility 4) How To Apply 5) Where To Apply 6) Forgiveness Basics 7) Resources & Questions
Slides will be available through Rep. Guzzardi’s office by request, and I will link to a recording here on my blog.
As an exciting bonus, the webinar will be translated into Spanish, by the talented Elsa Prado. She was kind enough to invite me as a guest on her Spanish-language show Alas de Amor this past Saturday — and I managed to pull off about 85% of it without resorting to English, though she was kind enough to expertly translate when I did.
In either language, please join us to learn about the current status of the Paycheck Protection Program and how you can determine eligibility and apply for a non-taxable forgivable loan to help your business stay afloat during these challenging times.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
From the Chicago Department of Business Affairs & Consumer Protection:
The U.S. Small Business Administration (SBA) Paycheck Protection Program will support small businesses throughout the country with up to $284 billion toward job retention and certain other expenses. Businesses apply for PPP loans through a bank, credit union, community lender, online lender or other participating lenders. Please note that some lenders may not be participating in the program – please contact your preferred lender to determine if they are participating. Learn more at sba.gov/ppp and find a lender using the SBA Lender Match Tool. While BACP does not manage the Paycheck Protection Program, we will be holding webinars and continuing to share information in the coming days and weeks. The first webinar, “The Paycheck Protection Program and Other Emergency Funding Opportunities,” will be presented by the U.S. Small Business Administration and Accion Chicago on Tuesday, January 19, at 3:00 pm.Register and learn more at chicago.gov/businesseducation. More webinars will be planned in the coming weeks – stay tuned! To learn more about the PPP, please visit these links:
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January 11, 2021: The next round of the popular Paycheck Protection Program technically opens today — but only for a very small number of lenders, called Community Financial Institutions. According to CPA Practice Advisor, “To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13. The PPP will open to all participating lenders shortly thereafter.”
In the finance industry, this is being referred to as the “Soft Launch” of the PPP. The reason for this tiered approach is that these institutions (CFIs), and the disadvantaged businesses they often represent — many of them from underserved communities — were mostly shut-out of the first round of PPP back in April. Brian Thompson published a great article in Forbes yesterday, explaining the details, that I encourage you to read. In short, the SBA is trying to equalize access to business ownership and support for black and brown communities. So if you’re not in one of these groups, today’s opening is not meant for you. Please be patient.
Although only this small group of lenders will be the included in the Soft Launch, unfortunately very few of them will be prepared to take full loan applications this week. These CFIs are generally only accepting applications from their existing customers, and do not have the processing capacity to receive an influx of applications, especially from those outside the communities they serve.
My recommendation is to continue with the strategy that you have already devised — whether that’s working with your existing banking relationship, or with your CPA to apply through a lending portal (I am using the CPA Business Funding Portal, a joint program between the AICPA and biz2credit — more here — you can also use the platform for free to help prepare applications to be sent to clients’ existing lenders).
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
In an effort to push Congress into action, the IRS reiterated its stance on the PPP last week.
Late last week, the IRS and Treasury issued both a revenue ruling and a revenue procedure, doubling down on their stance that since businesses aren’t taxed on the proceeds of a forgiven PPP loan, the expenses aren’t deductible.
This isn’t new news, of course. The IRS is bound to statute on this one and doesn’t have any wiggle room — only Congress can legislate on the topic of what is taxable and deductible, whereas the IRS only has administrative oversight in this arena. They made it clear very early in the game — April 30th, in fact — that they had no intention of accepting deductions for expenses that were paid for with PPP funds.
But in the ensuing months, Congress — despite broad bipartisan support for a measure to render these costs deductible — has been stuck in gridlock and failed to pass legislation making it so. This recent action on the part of the IRS seems designed to signal Congress that only by their action will the original intent of the CARES Act be realized.
However, the IRS took this particular set of guidance one unfortunate step further, at least as far as my clients are concerned.
“If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”
Now, I have been attending the AICPA Town Halls since nearly the beginning of the pandemic, and they are still strongly recommending that no one apply for forgiveness before year-end unless: 1) they need to sell their business; 2) loan covenants are at risk; or, 3) they need to reduce FTEs after meeting a date-driven safe harbor.
Part of the reason for this suggested delay is the aforementioned statutory requirement that prohibits the IRS from permitting any deductions for expenses paid for with non-taxable income. (Also: likeliness of legislation authorizing automatic forgiveness under a certain threshold; and the need for further guidance in many areas that remain unanswered.)
The idea was that if forgiveness was not granted in 2020, then the deductions could be made as usual on tax returns filed in the first-half of 2021. When forgiveness was eventually granted on these PPP loans, one of two things would have happened: 1) Congress would since have acted to protect the deductions and therefore PPP funds could be accepted into non-taxable income; or, 2) Congress would not have acted, in which case the PPP income would effectively be made taxable in 2021.
To me, whether the expenses paid with PPP proceeds were deductible hinged on whether forgiveness was obtained; as a result, I strongly maintained that those expenses did NOT become nondeductible until that “condition subsequent” occurred. As a result, if a business were filing its 2020 tax return before word on its forgiveness application had come down from the SBA, the expenses would be fully deductible. After all, we have a little something called the “tax benefit” rule, which allows a taxpayer a full deduction if at the time of filing the return, no event has occurred to render the amount nondeductible. Then, if a future event occurs that is fundamentally inconsistent with the premise on which the previous deduction was based (for example, an unforeseen refund of deducted expenses, or in this case, the forgiveness of a loan), the taxpayer must take the deducted amount into income. Applying the principles of Section 111 to PPP loans, the taxpayer would be entitled to a full deduction in 2020, with a potential income pick-up in 2021 when the loan was forgiven.
But with this recent IRS guidance, as Tony points out — he was wrong (again).
According to the Ruling, it matters not whether the application for forgiveness has been filed by the time the tax return is ready to go; rather, what matters is that the taxpayer apparently knows, in their heart of hearts, that the loan will ultimately be forgiven. After all, as the Ruling explains, “Section 1106(b), (d), and (g) of the CARES Act, and the supporting loan forgiveness application procedures published by the SBA, provide covered loan recipients… with clear and readily accessible guidance to apply for and receive covered loan forgiveness,” a sentence which I would have found laughable had the lies contained within it not ruined the past six months of my life.
I won’t get into the details of what it means to “reasonably expect” forgiveness, or determine partial forgiveness, or whether or not the new safe harbor applies if you “reasonably expect” wrong. (I’ll let Alan Gassman, another fan of Tony’s, dive into those weeds.) But as a short summary: 1) You can deduct expenses on your 2020 return if you find out before the return is filed that the PPP loan didn’t get forgiven or if you decide not to apply for forgiveness; 2) If you guessed wrong about the amount of forgiveness (and therefore deductions), you can either a) amend the 2020 return to adjust the disallowance, or b) deduct the improperly disallowed expenses for 2020 in the year forgiveness is determined.
Somehow, with not only a revenue procedure but also a revenue ruling, the IRS managed not to address two big issues that their rulings raise: 1) How should a Schedule C filer handle the deduction question? For a self-employed person, it’s not the expenses that determine forgiveness, but rather a calculation based on their 2019 income. 2) Which deductions will be limited, and in what order (payroll, rent, mortgage interest, utilities)? This has serious ramifications for the §199A Qualified Business Income deduction, Research & Development credits, and the §163(j) Interest Deduction limitation.
But I am not even going to touch on those two issues. Why? Because I truly believe the IRS made this announcement to rile up Congress members into finally taking action. It might have worked.
The leaders of the Senate Finance Committee, chairman Chuck Grassley, R-Iowa, who is now battling a coronavirus infection, and ranking member Ron Wyden, D-Oregon, blasted the guidance issued by the Treasury. “Since the CARES Act, we’ve stressed that our intent was for small businesses receiving Paycheck Protection Program loans to receive the benefit of their deductions for ordinary and necessary business expenses,” they said in a joint statement Thursday. “We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income. As we’ve stated previously, Treasury’s approach in Notice 2020-32 effectively renders that provision meaningless. Regrettably, Treasury has now doubled down on its position in new guidance that increases the tax burden on small businesses by accelerating their tax liability, all at a time when many businesses continue to struggle and some are again beginning to close. Small businesses need help maintaining their cash flow, not more strains on it.”
Grassley and Wyden said they would continue their efforts to clarify in any end-of-year legislation the intended relief in the CARES Act to help small businesses at this critical time. “We encourage Treasury to reconsider its position on the deductibility of these expenses, and the timing of those deductions, to provide relief to the small businesses that need it most,” they added.
In the meantime… as an accountant, what do you tell your clients? As a small business owner, what do you do?
Well, if I’m right, and Congress is duly riled, then hopefully we’ll finally see some movement here, preferably before the end of the year, but (dear lord please) at least before tax season. At which point — poof — it becomes a non-issue (with the exception of the countless hours I and others have spent worrying and writing about it).
Tax Filing Approaches for Consideration 1) Wait and see • Use extensions until additional guidance or legislation is available • Pass-through entities don’t need to be concerned until March/April 2021 deadlines 2) File return and pay taxes • Assumes expenses paid with PPP funds will not be tax deductible • If this changes, the borrower can file an amended return 3) File return and deduct expenses** • Contrary to current guidance (but in the spirit of the PPP legislation)
For what it’s worth, Bill describes himself as a “wait and see” kind of guy. (I strongly suggest watching Bill’s participation in the most recent AICPA Town Hall — from 32:00 through 52:40. His logical process, description of history and legislative intent, and arguments are thought-provoking.)
I’ve already spoken with my tax partner, and our plan is to put all partnership and corporate clients on extension to avoid the unnecessary cost of approach #2 and the unnecessary risk of approach #3. Haven’t yet decided how to handle Schedule C self-employed filers… but also hoping we won’t have to cross that bridge.
In the meantime, it’s business as usual, trying to close out books and prepare for 1099s… as if it were any other pandemic year-end.
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In today’s AICPA Town Hall, they reviewed the reasons a business might decide to apply for PPP forgiveness now — even though we have been consistently recommending to loan recipients that they wait until there’s movement from Congress on an automatic or streamlined forgiveness program (and continue to do so).
Basically, unless you are: 1) selling your company; or, 2) potentially violating loan covenants because of the PPP being represented as a liability; or, 3) needing to lay off staff after meeting FTE reduction requirements; …you should still hold off on applying for forgiveness.
However, if you are in one of the groups above, then consider the AICPA‘s list of “Factors impacting timing of forgiveness application”: • Has the borrower spent the full amount of PPP funds? • Is borrower trying to sell the business? See Oct. 2 SBA Procedural Notice • Is the loan under/over the $150k dollar amount of potential threshold for simplified forgiveness in Congress? (New form for <$50K) • Has tax planning around timing of deductibility of expenses paid with PPP funds been considered? See Aug. 20 discussion with Ed Karl (AICPA VP of Tax) • Does the borrower need to make business operating decisions that may include FTE reductions? (See AICPA FAQ #10, below) • Does borrower want to get PPP debt off the books? Are there loan covenants to consider? • Is the lender even accepting applications?
It’s important to weigh all of these criteria before making the decision to apply for forgiveness.
And for reference, here’s AICPA FAQ #10: If a borrower applies for forgiveness before the end of the covered period, how does the FTE reduction safe harbor work in operation?
The instructions for the Form 3508 forgiveness application indicate that the borrower includes the number of FTEs at the end of the covered period OR the date the application is submitted. The SBA has provided information to lenders as follows: “When a borrower submits the completed application and a lender has processed the borrower’s forgiveness application, the borrower is no longer bound to the FTE restrictions. The covered period ends when the borrower successfully applies for forgiveness.”
To summarize: we still recommend, as does the AICPA, that unless you fall into one of the groups above, you hold off on forgiveness applications for now. Work with your CPA to run the numbers to make sure you meet the requirements as they currently stand — knowing they might get easier, but protecting yourself if they don’t — but hold off on the actual application until Congress takes some action, which will be coming eventually… it’s a question of “if”, not “when”.
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My colleague Eric Krienert will be teaching a one-hour webinar on October 22 on the topic of the Paycheck Protection Program. This session will provide an overview from a cooperative perspective of loans and forgiveness under the PPP. Beginning with the economic necessity certification, to qualifying expenses, to the spending timeframe and FTE limitation — an explanation will be provided on restoring FTEs and wage limitation before looking at the loan forgiveness application process. The session will conclude with a review of tax and other considerations.
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
Another late-night guidance drop from the SBA — this time, good news for PPP borrowers of $50,000 or less… and somehow managed without the Congressional action we’ve been waiting for that seems to have all but stalled out.
The SBA has released a new, streamlined forgiveness application for these borrowers (and has eased the burden on lenders as well) — but notably, the requirements are exactly the same as prior to this newest Interim Final Rule. It’s just the simplified application and reduced documentation that make it easier. This means that small business owners still have to meet all the forgiveness rules that were in place before this most recent development — and they must certify as such on the application.
So on the one had, it’s great news — on the other, I’m not sure how much this will help anyone… it’s essential to run the numbers and collect the documentation regardless, to confirm compliance, as well as for support should the forgiveness be audited or challenged.
This also is a far cry short of the “under $150,000” floor that has been introduced by numerous members of Congress. Maybe this is just a start, and it will be increased with a legislative act?
Regardless… because the calculations and documentation must be dealt with despite the shorter application (and kept for your permanent records), I still recommend using the free AICPA tool — PPPForgivenessTool.com — as it does an amazing job of taking care of much of the number-crunching behind the scenes, and turns out an application and supporting documentation pdf packet that should be just the thing for your files. It’s the best PPP calculation resource I’ve tested yet (and believe me, I’ve tested quite a few).
Given the slow pace of SBA forgiveness and the likelihood that there will be more relief coming from Congress after the election, the AICPA continues to recommend that borrowers hold off on applying for forgiveness for now — unless they need to because they’re selling a business or have restrictive debt covenants.
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Screenshot from 9/3/20 AICPA Town Hall of excerpt of new PPP rule index
The AICPA has come out with yet another amazing, free tool to help business owners administer PPP loans and accountants to advise them.
If you’ve been playing along, you know that the Small Business Administration (SBA)’s troubled and challenging Paycheck Protection Program (PPP) has had a ridiculous number of clarifications, FAQs, Interim Final Rules (IFR), and other guidance. Figuring out which piece of info is hidden in which document is nearly impossible.
The Paycheck Protection Program (PPP), under Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides small businesses with forgivable loans. Administered through the Small Business Administration (SBA), the PPP loan proceeds are to be expended on payroll, rent, mortgage payments, or utilities. The SBA, in conjunction with the Treasury, have released Interim Financial Rules (IFRs) and Frequently Asked Questions (FAQs) to provide guidance.
This searchable index allows users to easily find guidance on the PPP loan application, eligibility, allowable use of funds, loan forgiveness, maturity date, and more.
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The EIDL has two portions: an advance grant, and a 30-year loan.
The SBA provided guidance recently on the interaction of PPP loan forgiveness with advances on the Economic Injury Disaster Loans (EIDL), in the form of adding three Q&As to its August 11th FAQs.
Many of my clients, as well as countless other small businesses, applied for loans under both the PPP and EIDL programs and received them. For EIDL, they could receive 1) an advance grant (generally measured at $1000 per employee), which in theory was automatically forgiven, and 2) a 30-year working capital loan at an interest rate of 3.75% (2.75% for nonprofits). Applicants could apply for or receive either the advance grant, the loan, or both.
Though the CARES Act does not call for it, and the SBA did not expressly state it, the AICPA began reporting some months ago (presumably based on information received from their regular meetings with Treasury) that the EIDL advance grant would have to be subtracted from PPP forgiveness. There was much disagreement in the CPA world as to whether or not this was indeed the case, as the SBA forgiveness application could be interpreted either way.
However, with these new FAQs, the SBA has put an end to that debate, confirming the AICPA’s position that the EIDL advance grants must be subtracted from PPP forgiveness.
The good news here is that at least these will, in effect, be converted into the PPP 1%-interest loans, rather than the 3.75% EIDL. The bad news is that the PPP loan term is only 2- or 5-years (depending on when the loan was signed), rather than the 30-year EIDL.
Therefore, if you have a large EIDL advance grant (at one point these were capped at $10,000, but there are some out there for more than this amount), and you will be challenged by paying it back, take a look at your PPP loan term. If it is 2 years (for loans prior to June 5), then contact your PPP lender to extend the PPP loan to a 5-year period.
This would be particularly important if the EIDL advance grant was larger than your PPP loan, as in these cases there will be no forgiveness.
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SBA gives borrowers a second chance at forgiveness.
Reported in yesterday afternoon’s issue of Accounting Today, “the U.S. Small Business Administration (SBA) has posted rules about how businesses who have been turned down for forgiveness of their Paycheck Protection Program loans can appeal the decision, and about how forgivable PPP loans interact with the SBA’s Economic Injury Disaster Loans.”
The SBA’s Office of Hearings and Appeals has been charged with PPP loan forgiveness denials, which means CPAs will not be permitted to represent the clients they have helped through the PPP process.
According to Accounting Today: “‘The process is a formal legal process, with representation of the borrower limited to attorneys,’ noted Ed Zollars, a partner in the CPA firm of Thomas, Zollars & Lynch, in a blog post Wednesday for Kaplan Financial Education about the new rules. ‘The special status granted to CPAs to practice before the IRS does not carry over to practice before the Small Business Administration.'”
The interim final rules on this matter take effect immediately, though comments are still being accepted.
“Business that appeal the loan forgiveness denial will need to have a copy of the loan review decision that’s being appealed, a statement about why the decision was erroneous, the relief that’s being sought, signed copies of payroll tax filings filed with the IRS and the state, as well as various federal tax returns and schedules… the SBA also wants the name, address, phone number, email address and signature of the appellant or attorney. The maximum length of the appeal petition should be 20 pages, not including any attachments.”
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
