The Paycheck Protection Program (PPP), created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, authorized loans to certain businesses affected by the COVID-19 pandemic.  I will be discussing both the prior PPP loans (PPPv1) already provided to businesses as well as the new upcoming PPP loans (PPPv2).

PPPv1

1. How do I apply for loan forgiveness and what forms should I use?

Contact your loan provider for information and instructions on how to apply for loan forgiveness.  There are three forms, the SBA form 3508, 3508ez and 3508s.  Depending on how much funding you received will determine which form to use.

UPDATE – The new COVID-19 relief bill will:

• Create a simplified forgiveness application process for loans of $150,000 or less. Specifically, a borrower shall receive forgiveness if a borrower signs and submits to the lender a certification that is not more than one page in length, includes a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount. The SBA must create the simplified application form within 24 days of the bill’s enactment and may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers are required to retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.

• Repeals the requirement that PPP borrowers deduct the amount of any EIDL advance from their PPP forgiveness amount.

• Includes set-asides to support first- and second-time PPP borrowers with 10 or fewer employees, first-time PPP borrowers that have recently been made eligible, and for loans made by community lenders.

2. When can I apply for PPP loan forgiveness?

You have, in most cases, up to 24 weeks from when your loan was disbursed to spend your loan funds on SBA forgiveness eligible expenses. (If your loan was disbursed before June 5, 2020, you can also choose an 8-week period to spend your PPP loan funds on SBA forgiveness eligible expenses.)

You should carefully evaluate your particular circumstances to determine if utilizing the full available 24-week period would be beneficial to you in maximizing your loan forgiveness. If you choose the 24-week period, you can apply for forgiveness before the end of the 24-week period – if you have used all of the loan proceeds for which you are requesting forgiveness.

If you don’t submit a loan forgiveness application within 10 months after the end of the 24-week period beginning on the date your loan was disbursed, your loan will go into repayment status and monthly loan payments will be required.

3. Are PPP expenses tax deductible?

The new COVID-19 relief bill also specifies that business expenses paid with forgiven PPP loans are tax-deductible. This supersedes IRS guidance that such expenses could not be deducted and brings the policy in line with what the AICPA and hundreds of other business associations have argued was Congress’s intent when it created the original PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

The COVID-19 relief bill clarifies that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income provided” by Section 1106 of the CARES Act (which has been redesignated as Section 7A of the Small Business Act). This provision applies to loans under both the original PPP and subsequent PPP loans.

While the CARES Act excluded PPP loan forgiveness from gross income, it did not specifically address whether the expenses used to achieve that loan forgiveness would continue to be deductible, even though they would otherwise be deductible. In April, the IRS issued Notice 2020-32, which stated that no deduction would be allowed under the Internal Revenue Code for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a PPP loan because the income associated with the forgiveness is excluded from gross income for purposes of the Code under CARES Act Section 1106(i).

PPPv2

1. Who is eligible to apply?

PPPv2 loans will be available to first-time qualified borrowers and, for the first time, to businesses that previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:

• Have 300 or fewer employees.

• Have used or will use the full amount of their first PPP loan.

• Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.

2. What are the PPPv2 loan terms?

As with PPPv1, the costs eligible for loan forgiveness in PPPv2 include payroll, rent, covered mortgage interest, and utilities. PPPv2 also makes the following potentially forgivable: 

• Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.

• Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.

• Covered operating costs such as software and cloud computing services and accounting needs.

To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll over a covered period of either eight or 24 weeks — the same parameters PPPv1 had when it stopped accepting applications in August.

PPP borrowers may receive a loan amount of up to 2.5 times their average monthly payroll costs in the year prior to the loan or the calendar year, the same as with PPP1, but the maximum loan amount has been cut from $10 million in the first round to the previously mentioned $2 million maximum. PPP borrowers with NAICS codes starting with 72 (hotels and restaurants) can get up to 3.5 times their average monthly payroll costs, again subject to a $2 million maximum.

Please contact me if you have further questions or need help applying for the new PPPv2 loan or need help with the forgiveness of your current PPPv1 loan!  My staff and I are here to help you!

David Castillo, CPA

David Castillo CPA | 12/24/2020