May 14, 2020
We want to alert our clients, colleagues and other advisors to significant new developments regarding the federal Paycheck Protection Program (PPP) loans issued by the Small Business Administration (SBA) through local banks.
New Guidance Removes Uncertainty Regarding Good Faith Certification For Necessity Of PPP Loans And Extends Date For Penalty Free Repayment
All PPP loan applicants must certify in good faith that the loan is necessary, by confirming that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” In prior guidance (issued over the last few weeks), the Treasury Department had questioned whether certain applicants, particularly including larger companies, could make this statement in good faith. In fact, the Treasury Department had instituted a safe harbor rule under which companies that received a PPP loan, and now reconsidered this certification, could repay the loan with no questions asked.
Loans Under $2 Million Dollars. In guidance issued on May 13, 2020, the Treasury Department made a significant change to its repayment requirements. First, for any borrower that, together with its affiliates, received PPP loans of less than $2 million, such borrowers “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” Based on this guidance, recipients of PPP loans of less than $2 million do not need to return their loans because of concerns regarding the certification.
Loans Over $2 Million Dollars. For borrowers of loans over $2 million, the Treasury Department stated that such borrowers may still have an adequate basis for making the certification, based on their individual circumstances. If the SBA determines that a borrower lacked an adequate basis for this certification, the SBA will seek repayment of the loan. If the borrower repays the loan after receiving this notification, the SBA will not pursue administrative enforcement or referrals to other agencies.
This guidance removes significant uncertainty for PPP loan recipients, who were faced with potential federal penalties if the SBA later disagreed that the recipient needed the PPP loan.
Extended Date For Repayment. If a PPP loan recipient still wants to repay its loan now, the Treasury Department has also extended the date for penalty free repayment to May 18, 2020.
New Tax Guidance From Internal Revenue Service Regarding Taxability Of PPP Loans
In a recent Internal Revenue Service (IRS) notice (Notice 2020-32), the IRS stated that it would not allow companies to deduct expenses, such as payroll or rent, that were paid with a PPP loan which was forgiven.
Normally, a loan that is forgiven constitutes taxable income. However, in the CARES Act establishing the PPP loan program, Congress had specified that a forgiven PPP loan would not be considered as taxable income to the recipient.
Under the IRS Notice, the net tax result for most taxpayers will generally be same as if the PPP loan was treated as taxable income and the expenses that were paid with the PPP loan were deductible as normal. In other words, the IRS Notice seems to contradict the premise that a forgiven PPP loan would not be taxable. For that reason, this Notice was surprising to many observers.
Congress may act to overrule this IRS Notice. In fact, there is a bill that has been introduced in the U.S. Senate that would overrule this Notice. It may also be subject to future tax litigations to be decided in the courts.
If you have any questions about this alert, please contact the Financial Services and Incentives members of our COVID-19 Response Team indentified below.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.