May 11, 2020
The U.S. Small Business Administration (SBA) continues to update their FAQ document and provide additional guidance on the Paycheck Protection Program (PPP). Recently, the document was updated to address safe harbor repayment deadline, Employee Retention Credit, and affiliation rules. A summary of the new guidance is provided below. We have also included a timely update on the issue of the deductibility of forgivable expenses related to the PPP.
Extension of PPP Safe Harbor Repayment Date
The SBA's safe-harbor period for returning PPP funds has now been extended to May 14, 2020. Borrowers do not need to apply for this extension as it will be automatically implemented by the SBA. A May 7 deadline for returning funds was initially provided by the SBA for companies that received PPP funds but later determined that they were unable to certify in good faith that their PPP loan was necessary to support ongoing operations.
One situation in which a business might consider returning the funds is if, in fact, the PPP funds are not necessary to support ongoing operations or if there is sensitivity to the public nature of these loans. Any business that repays the loan in full by May 14, 2020 will be deemed by the SBA to have made the required good faith certification on their PPP loan application.
Employee Retention Credit
Employers who take advantage of the PPP loan and forgiveness are not eligible to receive the Employee Retention Credit that is part of the CARES Act. However, those who elect to return the PPP funds by the May 14 safe harbor deadline will be eligible for the credit (as long as they are otherwise an eligible employer for purposes of the credit).
The tax credit is equal to 50% of qualified wages paid to employees after March 12, 2020 and before January 1, 2021, up to $10,000 per employee. It is a refundable tax credit against certain employment taxes, equal to 50% of the qualified wages paid during the period referenced above. All employers are eligible for the credit including tax-exempt organizations, provided they have had a 50% reduction in revenue or full or partial suspension as a result of a government order as outlined in the credit.
There is also new guidance on how SBA's affiliation rules apply to counting the employees of affiliates in regard to the PPP's 500-or-fewer employee size standard. For purposes of the PPP size standard, all employees and employees of U.S. and foreign affiliates must be counted, absent a waiver of or an exception to the affiliation rules.
Deductibility of Forgivable Expenses
Legislation has been introduced in the Senate that would overrule an IRS notice and clarify that ordinary expenses funded by PPP loans are deductible by taxpayers. Notice 2020-32 states that taxpayers receiving loans through the PPP are not permitted to deduct normally deductible expenses to the extent the expenses were reimbursed by a PPP loan that was forgiven. If the new bill is enacted it would overturn that position and allow taxpayers to deduct covered expenses paid or incurred by an eligible recipient of a PPP loan that is forgiven. This legislation would be good news for our clients who have received PPP forgivable funds that are being used for the purpose of the program.