Update on PPP Forgiveness and Impacts

Update on PPP Forgiveness and Impacts

By: D. Keith Dunnagan, Esq.

September 15, 2020


Under the CARES Act, the Payroll Protection Program (“PPP”) was implemented providing financial relief to small businesses. In May of this year, the SBA rolled out its initial version of the loan forgiveness application. Subsequently, the PPP Flexibility Act (“PPPFA”) was enacted in early June resulting in amendments to the PPP and at some level streamlining the forgiveness process for some small businesses. Following the enactment of the PPPFA, the SBA again updated its loan forgiveness application in the middle of June. As the dust begins to settle the SBA within the last month has begun to take applications for loan forgiveness and many banks are now processing those applications.

If you took a PPP loan and are now looking at the forgiveness process, there are a few things that you should be thinking about. Generally, you rarely if ever want to be one of the first ones through the gate when sorting through a new legal framework, and this forgiveness process is likely not one where you want to be first in line. The SBA and banks are all still working through the forgiveness process and what it will look like.

Some practical considerations to think of as well: (1) Under current IRS rules, expenses covered by PPP funds currently are NOT deductible as business expenses. This means that if you received $100,000 in PPP funds and used all $100,000 on payroll, that $100,000 which is normally a deductible business expense under current rules would not be deductible on your taxes. This patently does not make sense. Under the CARES Act, the PPP funds and forgiveness were not to be taxed. By prohibiting the deduction of the expense, the government is indirectly taxing those funds. By not being able to take the deduction, your taxable income increases even though your income did not increase. There is some chatter and discussion that the federal government is looking to make the appropriate changes. However, you have to remember, your tax questions will be answered based upon the year you receive the forgiveness. There may be some reasons to wait a little bit to allow this issue to sort itself out.

(2) Another reason to wait, is if your business is based in California, you now have some more clarity on the tax front. On September 9, 2020, Governor Newsom signed AB 1577 into law which helps business owners that received a PPP loan. It is a tax conformity law, that brought California tax codes into conformance with the IRC (Internal Revenue Code) and states that in California “gross income” will NOT include any forgiven portion of the PPP proceeds. This is good. Normally, debt forgiveness is included as income and taxes are required to be paid on the forgiven money. However, like the federal government, California also does not allow for deductions of PPP covered expenses as explained above. Hopefully, we will see that relief enacted soon. However, since the California legislature has adjourned for the year, the earliest the issue can be taken up is 2021 unless an extended or emergency session of the legislature is called. Unfortunately, at this point, that seems speculative at best. Another reason to look at waiting until next year.

(3) Currently, under the rules of the PPPFA, 60% of the funds must be spent on payroll costs and by December 31, 2020 the business must return to pre-February 15, 2020 employment levels. If a business cannot meet this obligation it must show good faith attempts to rehire the laid off individuals or similarly qualified individuals without success or show that the business was unable to operate at pre-Covid levels because of compliance with OHSA, CDC, Fed. Dept of Health and social distancing requirements. If your business’ employment levels have not returned, you will want to wait so that you can comply with your good faith certification requirements. From a practical standpoint, you can’t say that as of Dec. 31, 2020 you made good faith efforts to return to pre-Feb. 15, 2020 employment levels if you sign your statement before Dec. 31, 2020. Make sure to be careful.

(4) For borrowers that took less than $150,000 in PPP funds, there has been a push to create a streamlined forgiveness program where the borrower would only have to certify that it used the funds for allowed expenses in order to be eligible for the forgiveness. Others have pushed a blanket forgiveness for all borrowers under $150,000. Given the number of loans issued under the program and the expected impact on reviewing such applications for loan forgiveness, there may be some good reasons to wait if your business falls into the less than $150,000 loan proceed category.

As with any new program, taking the time to understand the implications and requirements is paramount. The PPP and now the forgiveness component are constantly being refined. Gaps are being discovered and the SBA is being asked to comment on policy related to the program. The SBA maintains its FAQ site which is periodically updated as new policy determinations are made. One question that came up as a result of the PPPFA was whether a borrower had to wait a full 24 weeks before submitting an application for forgiveness. The answer has generally been “no”. A borrower can submit at any time, but one must remember that there are certain documents, including tax forms (ie. Form 941) that will need to be submitted with the application as verification of payroll costs. Submitting without such required forms may delay the decision on your application for loan forgiveness or may have the negative effect of reducing your forgiveness amount.

While the PPP forgiveness portal is now open, it is important to take the time to prepare a well-documented loan forgiveness application. Work with your lawyer, CPA and banker to put together the application needed to get you the most forgiveness. With the extended covered period, most businesses should be able to qualify for maximum forgiveness provided that there are no payroll or employment reduction issues. Take your time and make sure the application is right. Understand that the decision is not going to be quick upon filing the application. Under the current legal framework, the lender has 60 days to make a recommendation to the SBA upon receipt of the application for loan forgiveness. After making such recommendation, the SBA then has 90 days to issue its determination. This process will not be quick, and you don’t need to rush it. There was urgency to initially get applications submitted once the covered period was over, but with the PPPFA extending the deferral period to allow businesses a longer period to work through the forgiveness application there is ample time to work on your submission. If you obtained a PPP loan prior to the enactment of the PPPFA, many lenders have automatically extended the deferral period, if you are unsure whether your lender extended the deferral period, check with them. This is not likely to be a scenario where the first one to the finish line will necessarily win.
The business lawyers at BPE are helping businesses navigate the PPP process and assisting in working with clients and their lenders on working through the loan forgiveness issues. If you need assistance, make sure to get competent legal and accounting assistance. The information contained in this article is for informational purposes only and not construed as legal advice. If you have questions, you should seek competent legal representation to assist you.

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