Although the Paycheck Protection Program under the CARES Act has been criticized from many quarters, it has been passed at lightning speed and has made tremendous strides in getting funds into the hands of those who need it. needed it. Attention, for those who received help, has now been focused on the forgiveness aspect of the loans received, according to Tom West, a director of the transfers group of the Washington National Tax Practice at Big Company. KPMG oven.
“At first the problem was eligibility,” he said. “Now that we’ve moved on, the question becomes, what about forgiveness – how do you document the expenses? Assuming you get a rebate of a certain amount, what are the tax consequences? “
“Initially, the question arose as to whether expenses that used the proceeds of a canceled P3 loan had an impact on the deductibility of the expenses,” observed West. “The IRS responded to this in Notice 2020-32. He said that in fact these expenses are not deductible.
West, a former tax legislative adviser and acting deputy treasury secretary for tax policy, believes the advice was wrong. “The decision came as a surprise to many people affected by the problem,” he said. “There are merits on both sides. From a political standpoint, the IRS could have gone both ways. Maybe they blew up a hornet’s nest on it. If you think of a normal loan and use its proceeds for business expenses, it would be deductible. If, for some reason, this loan is ultimately canceled, it does not change the deductibility of the expenses, but it does create a write-off of debt income.
“Unfortunately, the conversation around this refers to a ‘double benefit’ if the expenses paid with the forgiven loan proceeds are deductible,” he said. “I don’t see it as a double advantage, but as a sought-after advantage.”
“Many members of Congress, including Senate Finance Committee Chairman Chuck Grassley, have said the IRS position in Notice 2020-32 is contrary to the legislative intent of the PPP,” said Norman Lencz, tax partner at the Venable law firm. “In addition, a number of professional organizations, such as AICPA, have issued statements calling for Notice 2020-32 to be rescinded or rescinded by legislative action. Additionally, many practitioners have argued that the notice is inconsistent with the Internal Revenue Code and the CARES Act. As a result, he predicted, “The position set out in Public Notice 2020-32 may be overturned by legislative action, further guidance from the IRS, or a court ruling.”
In mid-May, the Small Business Administration released a loan forgiveness request and step-by-step instructions, which include a number of steps to ease the burden of compliance and the process for borrowers:
- Options for borrowers to calculate salary costs using an “alternative salary coverage period” that matches borrowers’ regular pay cycles;
- Flexibility to include eligible salary and non-salary expenses paid or incurred during the eight-week period after companies have obtained their PPP loan;
- Step-by-step instructions on how to do the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
- “Borrower-friendly” implementation of statutory exemptions from the reduction in loan forgiveness based on re-employment before June 30; and,
- The addition of a new exemption from the loan forgiveness reduction for borrowers who made a good faith written offer to rehire workers that was refused.
“Companies whose loans have been funded should now focus on carefully monitoring how they spend their PPP loan,” said Michael Greenwald, partner and head of business entity tax practices at Top 100 Firm Friedman LLP. “The second round of PPP was a little more effective in reaching the borrowers initially foreseen by the program. They limited the ability of the big banks to dominate the flow of funds by closing their windows for a certain period of time each day, and they set money aside for small community bands and credit unions.
Naturally, there are issues as to what is included in the eligible costs, Greenwald said. “Eligibility for PPP loan cancellation may be reduced if less than 75% of funds are spent on salary costs, if fewer full-time equivalent employees are employed than during the base period, if the salary or an employee’s salary is less than 75% from the previous quarter, and the reduction in the number of employees and / or compensation is not corrected by June 30, 2020. “
Greenwald suggests keeping the PPP loan proceeds in a separate bank account to make it easier to track how the funds are used. He noted that the guidance so far does not cover all situations. “What if an entity leases space from another entity that is a related party?” Or when I took out the loan, I sincerely believed I qualified because of the economic uncertainty. How do you define economic uncertainty – is it just for the eight week period or my entire economic future? … The SBA has threatened criminal penalties for misrepresentation and misrepresentation, so documenting the use of these funds is crucial.
“Treasury Secretary Mnuchin said he would review every loan to make sure that the people who get the loans really need them,” noted Dan Friederich, managing director of Top 100 Firm CBIZ MHM. “Who knows if they have the manpower to do it? There are many open questions about forgiveness. For example, how do you account for expenses over the eight week period? How do you calculate the number of full-time employees for pardon purposes? There is no right or wrong answer, we just need certainty.
Real world problems
“There’s a lot of confusion waiting for advice,” agreed Brian Newman, partner and head of federal tax practice at Top 100 Firm CohnReznick. “One of the biggest problems with restaurants / hotels is that they won’t be able to recruit staff fast enough. A restaurant that had 100 employees when it closed will not bring back all 100 immediately – there will be limits on how many seats at a time. “
“The other problem is that a lot of staff will not want to come back, either because they are afraid or because they are making more money with unemployment,” he said. “This makes it difficult to meet the criteria for spending 75% of payroll over the eight-week period. “
“I hope Congress takes this into account and changes the requirements to coincide with what is happening in the real world, where things are coming online very slowly and businesses need this money to survive,” he said. -he declares. “Many think they might as well stay closed if they can’t meet the criteria for forgiveness. They believe they will lose less money by staying closed than by spending money on the required payroll, bringing in staff and not meeting the demands for forgiveness. “
Roger Harris, president of Padgett Business Services, agreed. “Unemployment is attractive and it is difficult to get people back to work if the business is not open. Many are asking to change the 75-25 percent rule [at least 75 percent, with the remaining 25 percent on rent or mortgage interest, plus utilities] to a 50-50, to make it easier for small businesses to qualify for forgiveness. “
At the time of going to press, Treasury Secretary Mnuchin had indicated that the government would consider modifying the program to help small businesses qualify for pardon.
The other problem with Harris is the eight week time limit to use the loan proceeds. “Borrowers should be able to choose any period that is within six months of receiving loan proceeds,” he said.