The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, established the Paycheck Protection Program (PPP), which allowed employers to acquire a loan to cover payroll costs and certain non-payroll costs to help their businesses endure reduced economic activity resulting from COVID-19. The Paycheck Protection Program Flexibility Act (PPPFA), enacted June 5, modified aspects of how the program works. The Paycheck Protection Program (PPP) stopped accepting applications on August 8, 2020.
According to the AICPA, 86 percent of the $585 billion in PPP loans were for less than $150,000, providing small businesses some relief from the COVID-19 related business interruptions. If your company received PPP funding, navigating through myriad rules and procedures for loan deferral or forgiveness may be overwhelming.
We have summarized a few important facts that may assist you with navigating through next steps:
- On the forgiveness application forms (3508, 3508EZ, and 3508S), the program’s loan forgiveness displays an expiration date of “10/31/2020” in the upper-right corner, which has caused concerns on the part of some clients. The U.S. Small Business Administration (SBA) released guidance recently that confirmed that Paycheck Protection Program (PPP) loan forgiveness applications were not due on Oct. 31.
- An employer must submit its loan forgiveness application to the lender that provided the PPP loan.
- PPP borrowers may submit a loan forgiveness application any time before the loan’s maturity date, either two or five years from the loan’s origination, depending on the borrower’s agreement.
- Loan payments are deferred only until 10 months after the last day of each borrower’s loan forgiveness covered period. Employers will be required to begin repayments of principal, interest and fees after the last day of the 10-month deferral payment.
- However, if the forgiveness application is submitted within 10 months of the last day of the loan’s covered period, then the Employer is entitled to defer its payments of unforgiven principal, interest and fees until the date the lender is reimbursed by the SBA for the forgiven amount of principal and interest.
- The loan covered period is the period up to 24 weeks during which the employer’s payroll costs and other eligible costs could be covered by the loan.
- At least 60% of the costs covered by a PPP loan for which an employer is seeking forgiveness must be payroll costs for the loan principal and interest on that principal to be fully forgivable, with not more than 40% of the covered costs consisting of eligible non-payroll costs.
- The amount of loan forgiveness will be reduced if certain employment and compensation levels are not maintained or if less than 60% of the funds are spent on payroll over the loan covered period.
- Expenses paid using PPP loans are NOT deductible as a business expense. Forgiven PPP loans are not taxable income, but IRS Notice 2020-32 declared that no tax deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP-covered loan. Allowing the deductibility of expenses paid with PPP funds would result in a double-dipping scenario.
What Now?
Our recommendations are that you maintain accurate records of your expenses to create a paper trail of what may or may not be deductible. Secondly, apply for loan forgiveness as soon as you can to beat the processing rush. Check with your lender on the terms (2 years or 5 years) of your agreement. Finally, if you have questions about PPP or any other tax matters, contact Tene Thomas or Thomas Jones about any issues you may be facing. A short conversation today can alleviate possible issues in the future during tax preparation season.
Thomas Jones Jr., CPA
Partner
Tax and Small Business Solutions
Tene Thomas, CPA
Partner
Tax and Small Business Solutions
Source: Journal of Accountancy