The following outlines the  tax consequences of the Paycheck Protection Program (PPP) loans in connection with the coronavirus (COVID-19) crisis. An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of the following costs incurred and payments made during the covered period:

1. Payroll costs
2. Interest (but not principal) payments on any covered mortgage obligation (for mortgages in place before Feb. 15, 2020)
3. Any payment for any covered rent obligation (for leases that began before Feb. 15, 2020)
4. Covered utility payments (for utilities that were turned on before Feb. 15, 2020).

Covered period. Your covered period would normally have been the 24-week period beginning on the date you took out the loan (and ending no later than Dec. 31, 2020, if that was before the expiration of the 24-week period). If you received a PPP loan before June 5, 2020, you could elect a shorter 8-week covered period. If you did not elect the 8-week period and instead used the longer 24-week period, you had to maintain payroll levels for the full 24 weeks to be eligible for loan forgiveness. If you didn’t make an election, the 24-week period applies. An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered lease obligation or make covered utility payments.

Cancellation of indebtedness income. The reduction or cancellation of indebtedness generally results in cancellation of debt (COD) income to the debtor. However, the forgiveness of PPP debt is excluded from gross income. Tax attributes are not reduced on account of this exclusion.

Expenses paid with PPP loan proceeds. IRS has said that expenses paid with proceeds of PPP loans are nondeductible, because the loans are forgiven without the debtor having taxable COD income, so the proceeds are, in effect, tax-exempt income. Expenses allocable to tax-exempt income are nondeductible, because deducting the expenses would result in a double tax benefit. However, IRS’ position on this issue has been heavily criticized and key members of Congress have said that the denial of the deduction for these expenses is inconsistent with legislative intent that forgiveness of PPP loans be a nontaxable event. Congress may pass new legislation directing IRS to allow deductions for expenses paid with the proceeds of PPP loans.

The Paycheck Protection Program (PPP) Flexibility Act (“PPPFA”) of 2020 (H.R. 7010) bill was signed June 5, which provides more flexibility for participants in the PPP program, including allowing those participants to defer the payment of certain payroll taxes that the CARES Act prevented them from deferring.

The CARES Act contains a provision, Act Sec. 2302, that defers the payment of 50% of certain payroll taxes until Dec. 31, 2021 and defers payment of the remaining 50% until Dec. 31, 2022. The Act provides an exception to the above rule; under that exception, these deferrals don’t apply to any taxpayer which has had indebtedness forgiven under Act Sec. 1106 with respect to a loan under Small Business Act Sec. 7(a)(36), as added by Act Sec. 1102 (PPP loans), or indebtedness forgiven under Act Sec. 1109.

New law provides tax deferral relief. PPPFA eliminates the above exception and thus would allow taxpayers with these forgiven loans to defer payment of the payroll taxes.

Non-tax provisions in new law. The following are among the non-tax provisions in the new law:

• In the original CARES Act, PPP loans were forgiven if a business spent 75% of the loan money on payroll. PPPFA lowers that to 60%.
• PPPFA allows businesses 24 weeks, instead of the 8 weeks contained in the original CARES Act, to use the loan money. PPPFA also does not require businesses to wait for 24 weeks to apply for forgiveness; they can still do so after eight weeks if they prefer.
• PPPFA pushes back a June 30 deadline to rehire workers to December 31, 2020.
• The CARES Act required a business to rehire the same number of full-time employees or full-time equivalents by June 30, 2020. It provided one exception to that requirement. PPPFA provides additional exceptions if an employer is unable to rehire the required number of employees. For example, there is an exception if the employer Is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020
• For any PPP loan that is not forgiven, a business will have five years to repay the loan.

JT Goldstein recognizes the way you once did business pre COVID-19 may change going forward. As a result, we recommend that you innovate (i.e. pivot) currently and through post COVID-19. Accordingly, we developed a simple template to assist you with this process, along with some preliminary thoughts on how we think you should pivot. We want you to consider three types of innovation when approaching this document:

(1) Incremental – small improvements to existing products or services
(2) Sustaining – adding a product or service that complements what you do, but is not part of your offering.
(3) Disruptive – turning your business model upside down, a whole completely new product or service.

We stand to assist you and hope you find this planning document useful.

Click here to View: JTG Pivot Template

The U.S. Treasury Department and Small Business Administration (SBA) released two Interim Final Rules regarding the Paycheck Protection Progam (PPP). One rule assists borrowers in the preparation and submission of the PPP loan forgiveness application as well as provide guidance regarding the SBA’s process for reviewing PPP loan applications and loan forgiveness applications.

The “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act) authorizes the SBA to make loans to qualified businesses under certain circumstances. The provision established the Paycheck Protection Program (PPP). The program provides up to eight weeks of cash-flow assistance through 100% federally guaranteed loans to eligible recipients to maintain payroll during the COVID-19 public health emergency and to cover certain other expenses. If the recipient maintains their full-time staffing and wage levels, up to 100% of the loan is forgivable by the SBA if the loan proceeds are used to cover the first eight weeks of payroll, rent, mortgage interest, or utilities following loan origination. No more than 25% of the forgiven amount may be for non-payroll costs. If full-time staffing is decreased or wages are reduced by more than 25%, the level of forgiveness is reduced.

The first Interim Final Rule regarding loan forgiveness covers the loan forgiveness process, payroll costs eligible for forgiveness, non-payroll costs eligible for forgiveness, reductions to forgiveness amount, and documentation requirements.

• Loan forgiveness process. Borrowers must submit the Loan Forgiveness Application (SBA Form 3508 or equivalent) to the lender. In 60 days, the lender will determine whether the borrower’s loan may be forgiven and requests payment from the SBA. No later than 90 days, the SBA will review the loan and remit the appropriate forgiveness amount to the lender including any interest accrued. If the SBA determines the borrower is not eligible for a PPP loan, the loan will not be forgiven. If forgiveness is reduced or denied, the remaining balance of the loan must be repaid by the borrower on or before the two-year maturity of the loan.

• Payroll costs eligible for forgiveness. Payroll costs paid or incurred during the eight consecutive weeks of the covered period (56 days) are eligible for forgiveness. The period may begin on the date of the loan disbursement or the first day of the first payroll cycle of the covered period (“alternative payroll covered period”). Because the eight-week period may not align with the borrower’s payroll cycle, borrowers with a bi-weekly pay frequency (or more frequent) may use the alternative payroll covered period. The rules clarify that if a borrower uses PPP loans to pay furloughed employees salary, wages or commissions, these will be considered payroll costs. Additionally, hazard pay or bonuses may be included in the calculation of payroll costs if the employee’s total compensation does not exceed $100,000 on an annualized basis.

• Non-payroll costs eligible for forgiveness. Non-payroll costs are eligible for loan forgiveness when: (1) incurred during the covered period and paid on or before the next regular billing date (even if the billing date is outside the covered period) and/or (2) paid during the covered period. However, advance payments of interest on mortgage obligations are not eligible for loan forgiveness.

• Reductions in forgiveness. Reductions in full-time equivalent employees or salary and/or wages during the covered period may result in a reduction in the forgiveness amount. Exemptions include restoring staff and/or salary and wage levels by June 30, 2020 or when an employer offers to rehire an employee or restore hours but the employee refuses the offer. The borrower should maintain documents of the offer and rejection and is required to inform the state unemployment agency of the work refusal within 30 days of the employee’s rejection. Borrowers will not be doubly penalized and the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. Any employee fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction will not be counted towards the reduction.

• Full-time equivalent employee. The SBA and Treasury Department have clarified that a full-time equivalent employee (FTE) is an employee who works 40 hours or more. The rules note that the CARES Act did not define FTE and it has been decided rather than use the 30-hour standard for FTE as defined under the Affordable Care Act (ACA), the SBA and Secretary has chosen to use the 40-hour standard.

Documentation requirements. The rules note that the Loan Forgiveness Application details the list of documents required with the application as well as documentation that must be maintained. The second Interim Final Rule regarding borrower and lender responsibilities explains that the SBA will review individual PPP loans, what representations and statements the SBA will review and when an SBA loan review will occur. The rules also clarify that if the SBA determines a borrower is ineligible for a PPP loan, the loan will not be forgiven. The SBA may seek repayment of the outstanding PPP loan or pursue other remedies. Finally, the rules provide the loan forgiveness process for lenders.

JT Goldstein continuously finds new ways to assist our business community during the COVID-19 pandemic. We listed some requirements required for loan forgiveness of  The Paycheck Protection Program “PPP”, which are shown below. Please feel free to contact us for additional information on the PPP requirements. We are here to help you move forward!

PPP restricts your use of loan proceeds to the categories of expenses described below. The amount of forgiveness depends on the expenses you pay during the eight-week period after you receive your loan proceeds. Up to 100% of your PPP loan amount may be forgiven.

Permitted Expenses & Eligible for Loan Forgiveness

• Payroll costs (as defined in the Interim Final Rule) – At least 75% of loan proceeds must be used for payroll costs over the life of the PPP loan. Non-payroll costs may not exceed 25% of the forgiveness request.
• Interest on mortgage obligations (no payment or prepayment of principal) – for mortgages entered into before February 15, 2020
• Lease payments (rent) – for leases entered into before February 15, 2020
• Utility payments – for service agreements entered into before February 15, 2020
• Payments of interest on debt obligations incurred before February 15, 2020 – Not eligible for loan forgiveness

Based on current guidance, we expect that most PPP loan recipients will apply for forgiveness with sometime after the eight-week period following the disbursement of their PPP loan. You will likely be required to submit the following documentation to apply for loan forgiveness, pending more specific detail from additional SBA guidance:

• Documentation similar to what was provided to obtain the loan that supports your use of PPP loan proceeds during the eight-week period after you receive your loan proceeds.

Make sure to visit our twitter @JTGoldsteinCPA and our web for the latest updates COVID-19 financial impacts