Favorable Tax Provisions – Recently, the IRS published its position denying businesses a deduction for expenditures covered by PPP loan proceeds that had a reasonable expectation of being forgiven. Congress, however, has essentially overruled the IRS by legislating that business expenses paid by PPP loan proceeds will be deductible, despite the underlying loan being forgiven, or eligible for forgiveness. This is welcomed news for businesses!

In addition, taxpayers may now obtain a 100% (as opposed to the previous 50% limitation in place) deduction for business meals that will be paid or incurred between January 1, 2021 and December 31, 2022. This increased deduction only applies to business meals, whether dine-in or carry-out, provided by a restaurant.

Congress has also extended, for one more year, the increased limit from the CARES Act on deductible contributions to charity for corporate taxpayers and individuals who do not itemize their deductions. The limit on such deductions was increased to 100% under the CARES Act and shall now stay in place for charitable gifts made in 2021. Taxpayers must maintain documentation to substantiate any gifts made.

Employee Retention Credit – When Congress first passed a COVID-19 relief package, businesses had the ability to take advantage of a refundable payroll tax credit for retaining employees during the pandemic. Notably, businesses could not take advantage of this tax credit and also obtain a PPP loan. However, in this latest relief bill, Congress expanded eligibility for the refundable payroll tax credit to PPP loan borrowers, allowing both future and past borrowers to obtain the credits. Retroactive application of the credits to prior PPP borrowers is permitted.

Second Round of PPP Loans and EIDL Grants – Businesses that previously received a PPP loan may now be eligible to receive another forgivable loan based on the new relief package, provided that they meet the new eligibility criteria. A business is only eligible for a second PPP loan if they have 300 or fewer employees and had at least a 25% reduction in gross receipts for a single quarter in 2020 as compared to that same quarter in 2019. For bars and restaurants in particular, loan amounts must be calculated based on 3.5 times average payroll as opposed to the 2.5 multiplier for other business types. Regardless of the type of business, all PPP loans from the second round are capped at $2 million.

Congress has also mandated a new round of Emergency Injury Disaster Loan grants, for eligible applicants.

Streamlined Forgiveness – The new legislation includes provisions to simplify filing procedures for borrowers to obtain forgiveness for PPP loans for $150,000 or less. This is very good news for borrowers and loan processers alike, as it should save time and stress on obtaining forgiveness.

Sick and Family Leave Tax Credit Extensions – Family and medical leave tax credits provided under the Families First Coronavirus Relief Act will be extended through March 31, 2021, constituting a 90-day extension from the original expiration date of December 31, 2020.

Stimulus Checks – Finally, the new recovery bill provides stimulus payments to individuals, including children, of $600.00, subject to phaseout, similar to what was originally written into the CARES Act. Therefore, if you received a stimulus check during the first round of payments, you will likely be getting another, soon.

Please Consult a Professional Advisor – The first Coronavirus relief package was very complicated and changed very quickly in the weeks and months following its enactment. The second relief bill is nearly 5,600 pages long. It too shall be subject to scrutiny and may change or otherwise be refined as it is rolled out. Businesses are urged to consult with a professional advisor who can help them navigate the complexity ahead and maximize benefits available under the relief bill. Please contact your attorney at McCarthy Lebit to discuss your options and develop a plan that is right for your business.

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Normal commercial business “loans” must be repaid or else the forgiveness of the loan in full or part creates taxable cancellation of debt income. The PPP loans are unique in that the underlying law contemplates the forgiveness of the borrowed money if the borrower has met the criteria for loan forgiveness and submits documents to the lender requesting loan forgiveness. On May 2, 2020, the Department of the Treasury and the IRS released Notice 2020-32 which stated that no deduction is allowed for covered expenses that are otherwise deductible if the payment of the eligible expense results in forgiveness under a PPP loan.

Many commentators wrote to the IRS questioning how taxpayers should report the PPP loans and covered expenses on their 2020 income tax returns. One question is whether the banks issuing the PPP loans should issue IRS Forms 1099-COD for the amount of the PPP loans forgiven. Amounts reported on Form 1099-COD must be included in taxpayer’s income tax returns. In September 2020, the IRS issued guidance to the lending banks directing them not to issue Forms 1099-COD for the amount of the PPP loans forgiven.

Additional questions have been raised as to whether a taxpayer that received a PPP loan, that subsequently may be forgiven, can deduct the covered expenses in the year in which the expenses were paid or incurred. Multiple scenarios arise depending upon when an application for PPP loan forgiveness is submitted by the taxpayer and whether the application for forgiveness is approved or denied in either 2020 or in 2021. The IRS has just issued Revenue Rule 2020-27 and Revenue Procedure 2020-51 to address these questions.

Revenue Rule 2020-27 provides two fact patterns pertaining to taxpayers that properly applied for and received a PPP loan and incurred covered expenses during the covered period in 2020. In the first situation the taxpayer applied for PPP loan forgiveness before year-end 2020 but had no indication from the lender whether the loan would be forgiven. In the second scenario, the taxpayer had not applied for forgiveness before year end 2020 but expected to apply in the subsequent year. Both taxpayers had a reasonable expectation that their respective PPP loans would be forgiven, predicated upon the taxpayers’ compliance with the PPP loan rules.

Revenue Rule 2020-27 analyzed language in the CARES Act, prior IRS Notices, and certain case law, concluding that taxpayers cannot take tax deductions for expenses paid by a PPP loan that is reasonably expected to be forgiven. Whether the taxpayer had received confirmation of forgiveness, or had even applied for such, is irrelevant. What matters is whether the taxpayer, based on compliance with the program rules, has a reasonable expectation that the loan proceeds used to pay the covered expenses are subject to forgiveness. If so, then the taxpayer may not deduct the covered expenses.

Notwithstanding the clarity of Revenue Rule 2020-27, a taxpayer may wonder what happens if, despite having a reasonable expectation of obtaining loan forgiveness, the requested forgiveness is in fact ultimately denied. Or alternatively, what might happen if the taxpayer never actually files for PPP loan forgiveness? To address these contingencies, the IRS issued Revenue Procedure 2020-51, which provides a deduction safe harbor for covered expenses. Pursuant thereto, a taxpayer may be able to deduct some, or all, of the covered expenses paid for with PPP loan funds.

To be eligible for the safe harbor, the taxpayer must have paid or incurred covered expenses during the prescribed time frame and have a reasonable expectation of forgiveness. The taxpayer must also have, by the end of 2020, submitted, or intend to submit, an application for PPP loan forgiveness. Finally, the taxpayer must receive notification from their lender in 2021 that all or part of the loan forgiveness has been denied. Upon such notification, the taxpayer must irrevocably decide to not to seek loan forgiveness for the denied portion of their PPP loan. This can be accomplished by withdrawing the PPP loan forgiveness application. A taxpayer in this situation may deduct the otherwise nondeductible covered expenses paid for using PPP loan funds. Such a taxpayer, however, may not deduct an amount of nondeductible eligible expenses in excess of the principal amount of the taxpayer’s covered loan for which forgiveness was denied or will no longer be sought. As an example, if a taxpayer’s PPP loan amount was $500,000 and he spent the entire $500,000 on covered expenses during the prescribed time frame in 2020 and the forgiveness of the PPP loan does not happen in 2021, the taxpayer using the safe harbor may be able to deduct the $500,000 in eligible expenses in either his 2020 income tax return or alternatively in his year 2021’s income tax return.

A taxpayer making use of the safe harbor must attach a statement to their tax return on which the deduction is claimed, which must be titled “Revenue Procedure 2020-51 Statement”. The statement must include the taxpayer’s name, address and identification number, a statement specifying the taxpayer is eligible under Revenue Procedure 2020-51 and is applying the safe harbor rules, the amount and date of the taxpayer’s PPP loan, the total amount of forgiveness that was denied or abandoned, the date such denial or abandonment occurred, and the total amount of eligible expenses and nondeductible eligible expenses that are reported on the tax return.

PPP loan administration, forgiveness applications, and tax compliance remain challenging and changing. Please contact your professional tax advisors for additional assistance with maximizing the benefits available to your business and maintaining compliance with your tax obligations.

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Extension of Covered Periods

Through the Flexibility Act, borrowers can elect to extend the PPP’s eight-week covered period for loan forgiveness purposes to 24 weeks. This will give borrowers more time to strategically use loan proceeds to maximize forgiveness. However, because PPP guidance continues to evolve and change, borrowers should avoid using the extended period on the loan forgiveness application if full loan forgiveness can be achieved during the original eight-week covered period.

Use of Loan Proceeds

Previously, in order to obtain full loan forgiveness, a borrower had to spend at least 75% of loan proceeds on payroll costs and no more than 25% on non-payroll costs. If a borrower was unable to meet that 75% threshold for payroll costs, loan forgiveness would be proportionately reduced based on the actual percentage spent on payroll. Under the Flexibility Act, the 75% threshold has been lowered to 60%. The SBA and Department of the Treasury issued a joint statement that clarified borrower’s will still be eligible for partial loan forgiveness if less than 60% of loan proceeds are not allocated to payroll costs, as was the case with the previously higher threshold. While this provides flexibility in terms of spending loan proceeds on non-payroll costs, the lower threshold represents such a significant departure from the prior rule that borrowers should expect further guidance.

Rehiring Deadline Extension

Under the original text of the PPP, the forgivable portion of a loan was proportionately reduced if a borrower did not rehire laid off employees by June 30, 2020 to the level that existed February 15, 2020. Under the Flexibility Act, the “rehire date” has been extended to December 31, 2020.

Workforce Reduction Safe Harbor

In the event a borrower attempts to rehire employees but is unsuccessful, the Flexibility Act provides an exemption from a reduction in loan forgiveness if, during the period beginning February 15, 2020 and ending December 31, 2020, the borrower is able to document, in good faith, one of the following: (1) it could not find qualified employees to hire; or (2) it could not restore its business to a comparable level of activity because of federal health guidance such as social distancing.

Loan Repayment Extension

Prior to the enactment of the Flexibility Act, the period for repaying any loan amount not forgiven was two years. That repayment window has been extended to five years, with the interest rate remaining at 1%.

Payroll Tax Deferral

Regardless of whether a borrower receives loan forgiveness, the Flexibility Act has made clear that borrowers are eligible to defer their employer’s share of payroll taxes. If a borrower elects to defer such taxes, 50% of the deferred amount must be paid in 2021, with the remaining 50% due in 2022.

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A PPP loan is forgivable to the extent that borrowers carefully follow certain requirements implemented by the SBA. In order for a loan to be completely forgiven, borrowers must use at least 75% of the loan proceeds on payroll costs during the eight-week period after receiving the loan, while the remainder can be used for certain specific nonpayroll costs: rent payments, utility expenses, and mortgage interest payments. The intention of the program is for small businesses to maintain employment and compensation levels during this period of economic uncertainty due to the coronavirus pandemic. The attorneys at McCarthy Lebit have written extensively about the PPP in The More Report.

The PPP Loan Forgiveness Application and its instructions include measures to reduce compliance burdens and simplify the process for borrowers. Step-by-step instructions explain how to perform the forgiveness calculations required by the CARES Act and confirm eligibility for loan forgiveness. Notably, the 75% requirement is not an “all-or-nothing” requirement and a borrower who spends less than 75% on payroll costs is still eligible for forgiveness.  The application makes clear that in such a scenario, “eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount.”

The application also includes the option for borrowers to calculate payroll costs using an “alternative payroll covered period” which is an eight-week (56-day) period that begins on the first day of the borrower’s first pay period following the PPP loan disbursement date. Further, the application includes the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined. A copy of the application and its instructions can be found on SBA’s website. Borrowers also have the option to complete the application electronically through their lenders.

Additional guidance on the application is expected to be released soon. Given the potential complexity of the loan forgiveness calculations and the numerous requirements of the PPP, borrowers are advised to contact their professional advisors for help in completing the loan forgiveness application.

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Although FAQs #31 and #46 are specific to the required necessity certification, all PPP borrowers should carefully consider all the certifications contained in the PPP application. Keep in mind that a borrower who knowingly makes a false statement to obtain a loan may face imprisonment up to 30 years and/or a fine up to $1 million.  Given the possibility of steep penalties, if a borrower feels it received a PPP loan that it was not entitled to, for whatever reason, now is the time to act within the extended safe harbor deadline. If there is any doubt regarding one’s eligibility for an already disbursed PPP loan, do not hesitate to contact a trusted legal advisor at McCarthy Lebit that can inform you of all the SBA safe harbor guidelines.

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FAQ #46 asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The SBA’s response establishes a safe harbor for borrowers with loans less than $2 million and provides borrowers with the option to repay their loans if they are deemed to be ineligible for the program by the SBA.

The SBA reiterates in FAQ #46 that all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA determined, in consultation with the Department of the Treasury, that any borrower that received PPP loans with an original principal amount of less than $2 million will be deemed to have made the certification concerning the necessity of the loan request in good faith. Given the large volume of PPP loans, this safe harbor will allow the SBA to conserve its audit resources and focus its reviews on larger loans.

Additionally, borrowers with loans greater than $2 million may still have an adequate basis for making the good faith certification, based on their individual facts and circumstances. The SBA has previously stated in FAQ #39 that all PPP loans in excess of $2 million will be reviewed for compliance with the program’s requirements. FAQ #46 provides that if the SBA determines during the course of its review that the borrower lacked the adequate basis to make the certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding loan balance and inform the lender that the borrower will not be eligible for loan forgiveness. If the borrower repays the loan after receiving this notification from the SBA, the SBA will not pursue administration action or referrals to other agencies.

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Frequently Asked Question #37, published April 28, 2020, asks, “Do businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”  The SBA’s answer simply states, “See response to FAQ #31.” Thus, it appears that the SBA intends the information contained in FAQ #31 to apply to all borrowers, and not just those large companies with adequate sources of liquidity. The SBA has not, however, further defined what the phrase “adequate sources of liquidity” means. As stated in my previous post, the conservative approach is to treat FAQ #31 as if it applies to every single borrower.

Additionally, Frequently Asked Question #43, published May 5, 2020, asks whether a PPP borrower can obtain an extension to repay the loan in full beyond the May 7, 2020 date specified in FAQ #31. The SBA responded that it is extending the repayment date for this safe harbor to May 14, 2020, and borrowers do not need to apply for this extension. The SBA will promptly implement this extension through a revision to the SBA’s PPP final interim rule.

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The law and regulatory guidance applicable to PPP loans, including the interplay of PPP loans and the Internal Revenue Code (“Code”), continues to be examined, analyzed, and debated, as the guidance is ambiguous in parts. For example, the CARES Act did not address whether deductions available under the Internal Revenue Code (“Code”) apply to business expenses covered by a subsequently forgiven PPP loan, yet the CARES Act explicitly addresses the issue of excluding income for a forgiven PPP loan from gross income.  To help clarify the Internal Revenue Service’s (“IRS”) position on expense deductions, the IRS issued Notice 2020-32. This Notice states the IRS’s position that otherwise deductible business expenses for which the borrower pays with PPP loan proceeds from a loan that is subsequently forgiven shall not constitute deductible business expenses on the borrower’s income tax return.

Generally, taxpayers by statute are permitted a deduction for all ordinary and necessary business expenses paid or incurred in a taxable year, which typically includes rent, utilities, and payroll. Rent, utilities, and payroll also happen to be the cornerstone of forgivable expenses under the PPP loan program. But as the Notice states, the IRS is taking the position that allowing such deductions in conjunction with PPP loan forgiveness would create an unintended double benefit to the borrower. Therefore, citing to certain statutory provisions (that may or may not be applicable from a strict statutory construction standpoint) and certain case law interpretations, the IRS takes an announced position that expenses paid by a PPP loan that is subsequently forgiven are not deductible. There is some question as to the statutory basis for the IRS position on this issue and we assume there will be further debate and discussion. Congressional action may even be necessary to resolve it.

PPP loan borrowers will have the burden of tracking, documenting, and justifying forgivable expenses for their lenders, when the borrower applies for loan forgiveness. The same documentation should be shared with the borrower’s tax preparer to ensure a proper reconciliation of business expenses and deductions occurs. This will enable to borrower to avoid claiming improper business expense deductions due to PPP loan forgiveness, at least pursuant to current IRS guidance. But again, this may change if Congress acts.

Guidance pertaining to the PPP loan programs continues to move at a furious pace. Business owners should be constantly working with their professional advisors to ensure their interests are protected during these challenging times. Please contact a McCarthy Lebit tax attorney to discuss planning opportunities for your business.

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The SBA’s response to this question provides that all borrowers must assess their economic need for a PPP loan under the established guidance of the CARES Act and the PPP regulations at the time of the loan application.  Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere, borrowers must certify on their application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”  Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity to support ongoing operations in a manner that is not significantly detrimental to the business.

As an example, the SBA explains that it is unlikely that a public company with a substantial market value and access to capital markets is able to make the required certification in good faith.  Further, any borrower that applied for a loan and repays the loan by May 7, 2020 will be deemed by the SBA to have made the required certification in good faith.

The PPP loan application indicates that a borrower who knowingly makes a false statement to obtain a loan can face imprisonment up to 30 years and/or a fine up to $1 million.  Thus, while FAQ #31 is intended to curb the perceived abuse surrounding the first round of PPP applications, the end result is a subjective standard that raises additional questions for borrowers.

Who does FAQ #31 apply to?

The language of FAQ #31 asks whether businesses “owned by large companies with adequate sources of liquidity” qualify for a PPP loan.  However, the answer given by the SBA states that “all borrowers” must assess their economic need for the loan and carefully review the required certification.  Thus, the question arises, does FAQ #31 apply only to large companies with adequate sources of liquidity, or to every, single applicant?

The current PPP guidance does not provide an answer to this question.  As a result, the conservative approach would be to treat FAQ #31 as if it applies to every, single borrower.

What does the phrase, “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant,” mean?

Similarly, this question is not clarified in the related PPP guidance.  It would appear that every company can in good faith say they face “current economic uncertainty” as a result of the coronavirus and no business is totally immune to the pandemic.  However, the second part of the phrase – “necessary to support ongoing operations of the Applicant” – is much more subjective.

In determining whether the loan is “necessary,” the following factors should be considered:

• But for the PPP loan, would the applicant have fired or furloughed employees, or reduced compensation levels?
• Would the partners or shareholders of the company need to reach into their personal funds to retain employees?
• When will the business collect its receivables?
• Will the business be able to collect its receivables?
• What is the business’s burn rate?
• How quickly can the business replenish its cash reserves?
• How long can the business stretch its current cash reserves?

Further, when making PPP loan application certifications, applicants should consider the following:

• Impact on the industry. For example, a primarily dine-in restaurant is impacted more by the pandemic than a grocery store.
• Impact on the specific business. Some industries may see an influx of business as a result of the pandemic, whereas others may see business come to a standstill.
• Financial strength of the business. How long would the business be able to keep its head above water without the loan?  How much cash is coming in versus going out?  Will a business be able to collect its receivables?
• Management team. How adaptable and sophisticated are the business’s decision makers?  Is this a large or small group?  How flexible and prepared is the business for a catastrophic situation like this?

Reviewing Financial Statements and Projections

Applicants should also be sure to review their financial statements and projections when applying for a PPP loan.  Consider whether it is likely that the company will collect its receivables as they are due.  Also, consider the length of the pandemic in making projections.  However, a financial statement analysis alone should not be the sole consideration.  Keep in mind that the goal of the program is to keep people employed and to protect compensation levels.

Other Considerations

Comfort letters might be helpful to include with an application, which set forth a good faith statement of necessity in applying for the loan.  Borrowers may also want to document the specific reasons why they believe the loan is necessary and what actions they would have taken if they did not receive the loan.  Including financial projections showing an expected burn rate can also help support the necessity of the loan.  Finally, borrowers that clearly do not meet the eligibility standard set forth above should repay the loans by May 7^th as FAQ #31 indicates in order to avoid future problems.

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PPP loans are being distributed on a first-come first-serve basis, and many lenders are prioritizing loans for their existing client base. It is anticipated that this second round of funding will be exhausted just as fast as the first, and now is the time to contact your lender if your business has not already sought a PPP loan. As for those businesses that submitted applications but did not receive funding during the first round, it is prudent to verify with your lender whether there is a need to reapply or submit additional documentation.

For more details regarding PPP loans and the EIDL program, please refer to these additional resources prepared by McCarthy Lebit:

• Updated SBA Guidance for the Paycheck Protection Program
• CARES Act Expands the SBA EIDL Program
• New SBA Loan to Keep Workers Paid and Employed
• New Guidance for Self-Employed Persons Seeking Paycheck Protection Program Loans

The attorneys at McCarthy Lebit remain available to discuss any questions or needs that your business may have. We are continuing to stay apprised of COVID-19 developments and will continue to update our materials accordingly.

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