In the wake of a failed effort to incorporate a new stimulus package into the law, the Small Business Administration (SBA), together with the Treasury Department, issued new guidelines on October 8, 2020 to allow borrowers with Paycheck Protection Program (PPP) loans of $ 50,000 or more allow less to certify themselves, used the money appropriately, and received utter forgiveness.
While this most recent tentative closing rule, which addresses the PPP loans created under the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act), borrowers continue to submit documents such as a report on payroll providers committed, it offers a new, simplified form and a “check the box” process for forgiveness. Borrowers can use the new SBA Form 3508S to apply or wait for their lenders to update their online application portals.
The new rules also remove the need to show that the borrower has not reduced the number of employees or salaries and is therefore suffering a reduction in lending. Previous regulations stated that if an employer were to reduce salaries by more than 25%, an amount in excess of 25% would be unforgivable. Borrowers would also need to document that when they went on vacation they were making good faith attempts to reinstate them, or failed to hire similarly qualified people, or were also subject to an unforgivable portion of their PPP funds.
How the SBA justifies the $ 50,000 limit on simplified PPP lending
The SBA rationale for waiving these requirements for loans worth $ 50,000 or less is that nearly all borrowers in this loan amount category are sole proprietorships, independent contractors, or employers with an employee. The SBA stated as follows:
“Within this population of potentially affected loans, the SBA believes that most borrowers would not be affected by the lending reduction requirements because (1) the borrowers did not reduce their full-time employees, nor did they reduce their salaries or wages, or (2) the borrowers would qualify for one of the existing loan reduction exemptions. Without such borrowers, the total amount of US dollar PPP funds affected by these exemptions is negligible relative to the total amount of all US dollar PPP funds. “
The SBA released some data points to further justify their analysis that eliminating these borrowers from the need to keep headcount and salaries close to pre-COVID levels in order to receive full forgiveness is minor is. According to the SBA, 3.57 million outstanding PPP loans of $ 50,000 or less are out of the 5.2 million issued, which is roughly $ 62 billion of the $ 525 billion in PPP loans. Companies that do not report employees other than the owner or an employee received approximately 1.7 million PPP loans of $ 50,000 or less.
The SBA reckoned that the owners obviously wouldn’t vacation themselves, and employers with only one worker made up only $ 49 billion, or 9% of that loan spread. Therefore, even if those borrowers fired or reduced that one employee’s salary, the impact would be minimal.
This exemption has long been sought by lenders and the business community, albeit at a higher level. Initially, these interested parties asked for forgiveness of $ 1 million, or between $ 250,000 and $ 500,000. Those numbers turned out to be too ambitious, and the number for the potential new business cycle settlement was $ 150,000, a value that covers most PPP loans. The SBA likely settled at the $ 50,000 level to support the argument above that the employee impact would be small and the goal of the PPP loans would continue to be maintained.
While this new tentative closing rule solves an issue that left $ 135 billion in PPP funding on the table when the program closed on Aug. 8, 2020 and the reluctance of many employers, with no further clarity Asking for forgiveness, many problems are open to giving companies a break.
This is reflected in the fact that the SBA has received 96,000 requests for forgiveness to date and has not examined any of them. The SBA has announced that it will begin examining applications “shortly”. This new regulation will certainly reduce the SBA’s administrative burden on lending.
The IRS expense deduction rule remains a problem
The main open issue is the deductibility of expenses used with PPP funds. While the original CARES bill creating the PPP program made it clear that once the loan is granted and as a grant, the funds are NOT income earning and as such are not taxable. However, the Internal Revenue Service then issued guidance on April 30, 2020 (Announcement 2020-32) stating that expenses that are normally deductible to a business can NOT be used when used with PPP funds . Again, every group of lenders and corporate representatives has opposed this and hoped to find a solution in the new stimulus bill.
The main argument against this rule was simply fairness: if the intent was a grant, why would this government create a new tax burden on those companies that the government was trying to bail out? The IRS rationale, however, was that companies should not be allowed to “double up” by both receiving tax-free government money and making those deductions. Here, too, the IRS is alone with this assessment.
More importantly, the rule has created a gray area that many businesses now face. Before forgiveness, PPP is a loan and remains one until forgiveness comes. Because lenders have 60 days to review requests for forgiveness and the SBA 90 days, most borrowers won’t get a forgiveness decision until the first or second quarter of 2021, when then with the likely arrears. So the question arises as to whether borrowers are now taking the deductions and changing their tax returns after being forgiven in full or in part, or not taking the deduction and getting a refund if their PPP loan is not fully or partially granted. And what about possible penalties and interest?
Should Companies Apply for PPP Loans Now?
Since the PPP period is now 24 weeks, most companies should easily qualify for full forgiveness. While the rules dictate that 60% of PPP funds must be used for payroll and 40% for expenses such as rent, utilities, mortgage, and loan interest, it is wise and easier to document that all funds are used on payroll when possible. If borrowers can, the conservative approach is not to take the deductions and accept full forgiveness.
However, if borrowers want to hold onto cash or have forgiveness concerns, they can still make the deductions now. This is a business decision that borrowers should make in consultation with their accountant, attorney, and lender. In any event, most smaller loan borrowers, especially those with loans of $ 50,000 or less, should seek forgiveness sooner rather than later.
Many companies have held back requests for forgiveness, waiting to see what new laws would bring, like more clarity, relaxation of the rules, and a second chance at PPP money. The House version of the stimulus package offered businesses a second round of PPP funding, with sales down 50% in 2020 from 2019. In addition, employers with fewer than 300 employees and $ 25 billion for employers with 10 employees or fewer were deferred. and $ 10 billion to lenders in the community. The aim was to address complaints that women and minority companies were largely excluded from the first and second rounds of PPP lending. The bill also added supplier costs, worker protective equipment, and operations to the list of forgivable expenses.
Unfortunately, none of these improvements or additional funds have come about. Now it’s about reduced and targeted rescue funds for the aviation industry and maybe for restaurants and hospitality. The chances of anything happening before the November 3rd elections are slim.
Meanwhile, while things may and likely change with future regulations, at least the 3.57 million borrowers of loans worth $ 50,000 or less have much more clarity on both total forgiveness and total forgiveness the tax deduction.
Other items from AllBusiness.com:
Comments are closed.