Author Archives: Rebecca L. Simpson

As small businesses are beginning to receive and spend their Paycheck Protection Program (“PPP”) funds, many have questions on how they can spend those funds to maximize forgiveness of their loan. The CARES Act and the Small Business Administration (SBA) have given general guidance around what is required for PPP loan forgiveness, but the devil is in the details and many important questions regarding forgiveness have been left unanswered thus far.

Guidance on impact of employee declining offer of rehire

Some positive news on this topic, however, is that in its FAQ document (see question 40), the SBA has now issued guidance on this common question:

Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer? 

According to the FAQ document, the answer is in general “no.”  The guidance goes on, however, to note that the SBA and Treasury intend to issue an Interim Final Rule outlining the parameters for forgiveness under these circumstances, including:

• The offer to rehire must be for the same salary/wages and same number of hours;
• The offer to rehire must be in writing and in good faith; and
• The employee’s rejection of the offer must be documented by the borrower.

More guidance needed on important questions

This new guidance, hopefully, signals that more will be forthcoming from the SBA and Treasury on how borrowers can maximize loan forgiveness.  Some unanswered questions that remain include:

• For self-employed and independent contractors whose PPP loan amount is based on Schedule C, Line 31 of their IRS Form 1040, the regulations allow these individuals to pay themselves only 8 weeks of “payroll” (average net profit) out of their PPP funds. Mathematically, that 8 weeks only works out to about 74% of the loan amount, but the regulations require the borrower to spend 75% on payroll.  Will that impact forgiveness?
• Many small businesses received loans that are larger than 8 weeks of their average monthly payroll plus their mortgage interest, rent, and utilities. Can these businesses use these extra funds to pay their employees bonuses or hire more employees?
• Can self-rental payments be forgiven?
• Are there parameters around rehiring to maintain the same level of full-time employees? Do you have to hire for the same positions or can you create new positions?
• If the IRS requires you to show evidence that your certification of need was in good faith, what type of evidence will be sufficient?

These are just some of the unanswered questions surrounding forgiveness of PPP loans.  Finney Law Firm will continue to monitor guidance on PPP forgiveness as it is issued and will post updates on our blog.  If you have questions, please contact Rebecca L. Simpson at 513.797.2856.

If you have received Paycheck Protection Program (PPP) funds, you should be aware that the IRS has issued a notice that will increase the cost of using those funds.   According to IRS Notice 2020-32:

Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

What does this IRS ruling mean?

Normally businesses can deduct business expenses such as costs for payroll, mortgage interest, rent and utilities.   But, if you received a PPP loan and use the funds properly on those  four types of expenses so that your PPP loan is forgiven, the amount you spent on those expenses from PPP funds will no longer be deductible.

Why would the IRS make this rule?

According to the IRS, they are trying to prevent small businesses who receive PPP funds from getting what the IRS sees as a double tax benefit on the same dollars.  Normally when a loan is forgiven, the amount forgiven is counted as taxable income to the taxpayer.  In the CARES Act, Congress specifically provided that the amount of PPP loan forgiven will NOT count as taxable income.  So, the IRS sees that special tax exemption as one tax benefit.  According to the IRS, if a small business were also able to deduct the amount of PPP funds they spent to make the loan forgivable, then the deduction would be a second tax benefit on the same dollars.

The rule seems inconsistent with the intent of Congress.

While the IRS’s ruling in Notice 2020-32 is consistent with how exemptions and deductions are normally handed, it seems to run contrary to the intent of Congress in the CARES Act.  Given that Congress specifically provided that PPP loan forgiveness would not be counted as taxable income, it seems the intent of Congress was to provide small businesses with rescue funds without adverse tax consequences.  So, it will be interesting to see if Congress takes action to stop the adverse tax consequences the IRS just announced.

What does this mean for your business?

This ruling means that the cost of using your PPP funds will be higher than you likely anticipated.  If all or part of your PPP loan is forgiven, you will lose tax deductions on the business expenses you paid as directed by Congress and the SBA to make your PPP loan forgivable.

Conclusion

The Finney Law Firm will continue to stay on top of the latest PPP guidance and provide updates on our blog.  If you have questions, feel free to contact Rebecca L. Simpson (513.797.2856).

 

When the Paycheck Protection Program (“PPP”) ran out of funds last week, many of our nation’s small businesses hardest hit financially by COVID 19 were left without relief.  And, reports that hundreds of millions of PPP dollars when to large, publicly traded companies led to strong criticism of the program.  Over the last few days, we’ve learned that Ruth’s Chris Steak House, Potbelly, and even Harvard got millions of dollars in PPP funding.

New guidance

On the heels of attacks over this use of PPP funds, the U.S. Small Business Administration (SBA) has issued new guidance that sends a strong message that PPP funds secured by large companies that don’t really need the money may need to be paid back.

The SBA added the following question today to its “Frequently Asked Questions” document: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

You can read the full answer here (see question 31).  In summary, the answer reminds us that as part of the application process all PPP borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Successful public companies likely cannot make good faith certification of need

The answer to the FAQ also points out that it is unlikely that “a public company with substantial market value and access to capital markets” is able to make that certification in good faith.  According to the guidance, if such a company does make that certification, it needs to be prepared to provide the SBA with a basis for the certification.

What if such company already took PPP money?

Finally, the answer to the FAQ gives direction on what a company should do if it already made a certification of need that may not be supportable.  Essentially, it needs to pay the loan back by May 7, 2020:

“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.”

Conclusion

Finney Law Firm will continue to provide updates as more guidance is given by the SBA on the Paycheck Protection Program.  If you have questions about the PPP, please feel free to contact Rebecca L. Simpson at 513.797.2856.