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PPP Updates

As information regarding PPP funding continues to be released, we have seen some important guidelines provided for business owners in recent days.


IRS Provides Guidance on Deductibility of Expenses Related to PPP Forgiven Portion of Loan

The IRS has released guidance stating that any expenses you claim for forgiveness under the PPP may not then be deducted from your expenses. Since a forgivable PPP loan is already tax-free, this prevents double-dipping (getting free money from the same source twice).

There is a groundswell of support from various senators and the AICPA that this position be reversed allowing taxpayers to “double dip” and deduct the expenses. We will keep you updated if this changes.


Demonstrating and Documenting the “Economic Need” for a PPP Loan

On May 13, 2020, the Treasury released FAQ 46 regarding the required good-faith certification concerning the necessity of the PPP loan request.  The Treasury’s FAQ addresses both borrowers whose loan is less than $2 million and those whose loan is greater than $2 million.


Loans Less than $2 million

The Treasury stated, "Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith."


Loans Greater than $2 million

FAQ 46 does not provide clarification to borrowers with loans greater than $2 million as to what must be considered as part of the certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” As previously stated in FAQ 39 as issued on April 29, 2020, the SBA will review all loans in excess of $2 million and other loans as deemed appropriate.

In the event the SBA determines the borrower "lacked an adequate basis for the required certification concerning the necessity of the loan request," repayment will be required, and no forgiveness will be provided. In the event the borrower repays the loan, the SBA has stated that they "will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request."

If you received a loan greater than $2 million, we feel it is critical for you to spend the time and document your economic need for the loan:

  • Document the facts and circumstances surrounding your company’s position, thought process and considerations.
  • Keep detailed notes regarding the economic uncertainty your business is facing, the detriment to your ongoing business operations, and your access to other sources of liquidity. Include such items as:
    • Uncertainties faced resulting from COVID-19
    • Macro and micro economic data including industry demand data
    • Customer analysis – impact felt at the customer level that will likely translate to impact on your business
    • Vendor/pricing analysis
  • Develop a forecast/model, including scenario modeling of your business’ ability to cover payroll costs with and without this funding to support your notes.

We recommend that you have this analysis prepared now to meet the May 14th deadline.


PPP Funded Businesses that Cannot Open

There are many businesses that have received PPP funding but are not yet permitted to open. The eight-week clock to utilize the funds is ticking, but there is no reason to bring employees back until business operations resume.

These businesses have been anxiously awaiting further guidelines from the SBA. Unfortunately, we have not heard anything regarding extending the eight-week period or pushing out the start date of the eight-week timeline.

We are hopeful this will be addressed soon as there are a multitude of businesses in this exact situation. As each state reopens on its own timeline, this creates inequities based on location.


Sole Proprietor PPP Loans

Generally, PPP loan amounts are based on the average payroll expenses of the business. However, since sole proprietors and independent contractors typically don’t have payroll, their loan amounts are based on 2019 net profit.

To calculate this amount, the net income on Schedule C is divided by 12 to obtain a monthly “average” net income. This monthly average net income number multiplied by 2.5 equals the PPP loan amount:

Net income 2019 (reported on Schedule C) / 52 weeks * 8 weeks


Sole Proprietor Forgiveness

Beyond the amount of PPP funding they can qualify for, the biggest question we get from sole proprietors is: "How do I calculate and maximize the portion that will be forgiven?"

The PPP limits qualifying compensation to $100,000 per employee. For sole proprietors with no employees, the maximum possible PPP loan is therefore $20,833, with $15,384.62 automatically eligible for forgiveness as owner compensation replacement.

The remaining $5,448.38 can be forgiven if spent on the approved expenses over the eight weeks after funding. Approved expenses include rent, mortgage interest (on real and personal property) and utilities (electricity, gas, water, transportation, telephone, or internet access).


Example

Let’s say you filed your Form 1040 and Schedule C for 2019 and reported $96,000 in net income. Your monthly “payroll cost” would be $8,000 ($96,000/12), so you qualify for a $20,000 PPP loan.

The forgiveness calculation would be as follows:

Maximum owner compensation replacement: $96,000 / 52 * 8 = $14,769
Amount to be spent on eligible expenses: $20,000 - $14,769 = $5,231

As always, our team at BFLC is here to help. Please feel free to reach out if you have any questions on this topic or anything else.

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