The tax and financial impacts of COVID-19 continue to unfold rapidly. To help keep you up to date on these rapidly evolving changes, we have put together the most important things you should know from last week.
1. PPP Forgiveness Expenses NOT Deductible
On Thursday, April 30th the IRS issued Notice 2020-32 which clarified the treatment of expenses paid with funds forgiven through the Paycheck Protection Program (PPP). It was no surprise to us that in this ruling the IRS confirmed that expenses paid for with PPP loans that are forgiven will not be deductible.
Most taxpayers and preparers incorrectly assumed that businesses receiving a PPP loan which was forgiven would not have to pay tax on the loan forgiveness and would also get the benefit of deducting the expenses paid for with the loan proceeds. The CARES Act was silent to this point but being able to deduct the expenses would be a clear violation of §265(a)(1). Congress could pass a law to circumvent this section of the Code, but we think that is not likely.
The consequence is that the PPP loan forgiveness would in essence be taxable since it eliminates deductions. For instance, if you receive a PPP loan of which $100,000 is forgiven because you used the funds to pay “covered expenses” allowed by the CARES Act (generally eligible payroll costs, rent, utilities and mortgage interest) then you will not be able to deduct those “covered expenses” in addition to not recognizing the income from the loan forgiveness.
2. PPP Loan Forgiveness Spreadsheet
As the Paycheck Protection Program (PPP) begins to fund loans, our attention moves to the forgiveness portion of the law and its specific application. We still do not have guidance, so there is significant uncertainty and open items related to how these provisions will work. Ultimately, your bank and SBA will make the final determination on what will be allowed for forgiveness. However, we must plan for our business and fully leverage the forgiveness provisions of the law.
Boyer & Ritter, CPAs and Albin Randall & Bennett CPAs have created a strategic alliance to develop and update a PPP Loan Forgiveness Workbook along with a detailed tutorial and case study. The workbook is for planning purposes only, since there are many unanswered questions and your bank will determine its own set of rules. The workbook, tutorial and case studies can be found here. This is great tool and resource for planning how the forgiveness should play out and guide you through the expense payment decisions. We would recommend watching the workbook tutorial first.
Please take some time to review this information and use it as a guide for what portion of your loan should be forgiven. These expenses should coincide with your 13 week rolling cash projections and strategic plan for recovery.
3. An Eye on Recovery
There is much debate about the right way to reopen the economy in the aftermath of COVID-19. Regardless of where you stand on the issue of balancing health and economic concerns, one thing is certain, businesses will begin to reopen at some point and economic activity will start.
We have been working with clients to develop the best strategic plan and financial models necessary to navigate this crisis. Please see our high-level overview of the strategic themes that are emerging from this work. Your specific industry and how the pandemic affected your business will determine how your business will look after the crisis and its lasting impact. It is important to develop a strategic plan and supporting models to successfully navigate through recovery.
4. PPP New Rules
The banks have been distributing information warning business that they need to certify that they have “current economic uncertainty makes this loan request necessary to support the ongoing operations” or they need to repay the loan by May 7, 2020 to avoid penalties. This has created significant concerns for many businesses, particularly those still operating during the crisis.
This is the result of the highly publicized loans to some publicly traded corporations like Ruth’s Chris and Shake Shack. In response, the Treasury revised its Frequently Asked Questions (“FAQs”). Treasury added Questions 31 and 37 to address this matter and expand its guidance.
The new rule states that a business must consider its current business activity and its ability to “access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to the business.” Specifically, the guidance makes clear that a PPP loan applicant must carefully review and certify that “current economic conditions make this loan request necessary to support the ongoing operations of the applicant.”
You will need to make the required certification in good faith and should be prepared to demonstrate to the Small Business Administration (SBA), upon request, the basis for your certification. The guidance is not limited to public companies (see FAQ Question 37). Knowingly making a false statement to obtain a guaranteed loan from the SBA is not acting in good faith and is punishable under law, including material fines, possible criminal charges and imprisonment.
Treasury further provided that any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.
Strategy & Advise
We consider these measures to be a warning by Treasury to carefully consider your qualification for a PPP loan under these optics. Since, each business is different it should consider its individual facts and circumstances separately. We believe the key factors of consideration are access to capital to provide adequate liquidity and due to uncertainty at the time of the loan makes it necessary to support ongoing operations. These are extremely vague guidelines and there are no clear answers. We advise that if you believe the determination is not clear in your case that you prepare a detailed financial matrix of the use of funds and its necessity to support on going operations while preserving adequate liquidity. Although we may not be able to avoid a inquiry from the SBA, it will demonstrate a good faith assessment when making the certification.
5. Stimulus checks
The IRS continues to distribute stimulus payments under the CARES Act. The IRS made significant improvements to “Get My Payment” functionality on its website.
Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds.
Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child under the age of 17 as of the end of 2020.
If you have not received your stimulus payment you can use this tool to check the progress of your payment. Due to IRS shutdowns, this tool is the only transparency into these payments. Unfortunately, there is no other mechanism in place to find out the status of these payments or to correct errors.
In these uncertain times, we are continually evolving to ensure that we do what is in the best interest of our clients, team, and community.
We will continue to closely monitor the economic and tax changes and communicate important information to you timely and accurately. We are always available by phone or email to address your questions and concerns.
We strongly encourage you to leverage our expertise during these trying times. We have a deep understanding and broad view of the economic climate, which can add significant value during times of uncertainty. We are committed to assisting you in successfully managing through the rapidly changing economic environment.