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Update & New Guidance On Paycheck Protection Program Loans

October 12, 2020

Is now the time to apply for PPP loan forgiveness? JPS provides an update and new guidance on Paycheck Protection Program loans.

The CARES Act was signed into law by President Trump on March 27, 2020, and created the Payroll Protection Program (PPP), providing loans to assist qualifying businesses with payroll, mortgage interest, rent and utility costs due to the economic effects of COVID-19. PPP loan applications were accepted until August 8, 2020, and as COVID-19 economic difficulties continued, many businesses were unable to fulfill loan forgiveness requirements and were hesitant to use loan funding. The PPP Flexibility Act of 2020 was passed on June 5, 2020, significantly modifying and improving portions of the program.

Loans started being funded in early April, and by now it is likely that the majority of borrowers are at or nearing the end of the 24-week covered period, the time frame over which the funds could be spent on qualifying costs. Many businesses also spent all the money well ahead of the end of the 24-week period.

So, is now the time to apply for loan forgiveness? Many have already submitted forgiveness applications, while others have been waiting for additional relief or simplification to the process of applying for forgiveness.

SBA guidance for the program was issued frequently over the course of the summer, but guidance all but stopped by the end of August, and little has been released since. Legislation has been drafted that would grant automatic relief for loans of $150,000 or less, but with Congress still considering broader stimulus provisions, that bill has not passed. In hopes of this provision passing or other changes that would enhance the program, some borrowers have opted to hold off on applying for forgiveness.

There is also uncertainty about the financial statement implications of loan forgiveness, specifically timing. If a loan forgiveness application is submitted in 2020 and the company feels confident forgiveness will be granted, but the SBA does not approve forgiveness until 2021, in which year should the loan be reclassified and recognized as income? Guidance is still needed to make this determination.

Lastly, the issue of taxability remains up in the air. The CARES Act clearly indicates that a forgiven loan is not taxable income. However, on April 30, 2020, the IRS issued a notice indicating that expenses paid with forgiven PPP loan funds will be non-deductible. For many, this has the same effect as making the forgiven loan taxable. And, similar to the financial statement issue noted above, does the timing of SBA’s decision affect which year the tax impact is realized? Members of Congress have indicated that the IRS’s conclusion is contrary to their intent and, in May, tried to supersede the IRS’s decision with a bill, The HEROES Act, which only passed in the House and did not become law.

With these issues undecided and payments on unforgiven loan balances not being required until ten (10) months after the end of the covered period, many borrowers feel that there is no need to hurry and apply. For others, they are ready to be done with the program and get the loan off their balance sheet. We recommend that you consider all these factors in determining what is the right time for you to apply for loan forgiveness.

Recent Guidance
On October 2, 2020, the US Treasury issued guidance addressing various requirements that PPP loan recipients must consider ahead of a change in company ownership. While the guidance is primarily addressed to lenders and attorneys working with borrowers, if you are in the process of selling stock or assets in your company or anticipate that this could occur before you obtain loan forgiveness, you should review this guidance.

On October 8, 2020, the SBA released a new PPP Loan Forgiveness Application for loans of $50,000 or less. The new application, Form 3508S, is a simplified application and is now one of three forgiveness applications (Form 3508, 3508EZ, 3508S) available. This new application does not provide automatic forgiveness.

PPP loans of $50,000 or less account for 3.57 million of the 5.2 million approved loans, amounting to $62 billion. 1.71 million of these borrowers have no employees or just one employee.

Below is a summary of the guidance regarding PPP loans of $50,000 or less which are reflected in the new Form 3508S and its instructions.

  • Borrowers are not required to reduce the amount eligible for forgiveness based on:
    1.  a reduction in employees’ salaries or wages
    2.  a reduction in the number of full-time equivalent employees (FTEs).
  • While some documentation will still be necessary, the new, simplified form does not illustrate the math computations as the other forms do. In fact, there is no math on this form at all. Instead, an additional representation is required by the borrower indicating that they complied with the terms of the program.

  • The provisions of the program are the same for these smaller loans, and documentation to support the qualifying expenses is still required.

  • Lenders can rely on the borrower’s representations identified in the form without further attestation required.

In summary, the new Form 3508S should provide a more streamlined and simplified process for those with a PPP loan of $50,000 or less.

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To learn more about the CARES Act and PPP Flexibility Act of 2020, click here.

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