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BHBM Tax Law Alert | Additional Guidance Regarding Application of the PPP


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FEDERAL TAX LAW UPDATE

Treasury Extends Safe Harbor Repayment Date for Paycheck Protection Program

On May 6, 2020, the Small Business Administration (SBA) and the Department of Treasury provided updates to the Frequently Asked Questions (FAQs) issued in connection with the Paycheck Protection Program (PPP), established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Specifically, the FAQs state that the repayment date for the certification safe harbor is extended from May 7, 2020 to May 14, 2020. In addition, the FAQ also states that the SBA intends to provide additional guidance on the review process with respect to PPP certification prior to May 14, 2020.

Deductibility of Expenses When Loan is Forgiven Under Paycheck Protection Program

On April 30, 2020, the IRS released Notice 2020-32 (the “Notice”), which provides guidance regarding the deductibility for federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program (PPP).

Prior to the release of the Notice, it was unclear whether borrowers would be able to exclude forgiven loan amounts from taxable income and deduct covered expenses under the PPP as ordinary and necessary trade or business expenses. The Notice clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the income associated with the forgiveness is excluded from gross income under the CARES Act.

Treasury Provides Additional Guidance Through Updated FAQs

 
The Small Business Administration (SBA) and the Department of Treasury recently provided updates to the Frequently Asked Questions (FAQs) related to the Paycheck Protection Program (PPP), which was established by section 1102 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other things, the FAQs provide additional guidance concerning borrower eligibility, changes of ownership, loan reviews and loan forgiveness, as follows:

Borrower Eligibility
 
To determine borrower eligibility under the 500-employee or other applicable threshold established by the CARES Act, must a borrower count all employees or only full-time equivalent employees?
  • For purposes of loan eligibility, the CARES Act defines the term “employee” to include “individuals employed on a full-time, part-time, or other basis.” A borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold. For example, if a borrower has 200 full-time employees and 50 part-time employees each working 10 hours per week, the borrower has a total of 250 employees.

Change of Ownership After February 15, 2020
 
Section 1102 of the CARES Act provides that PPP loans are available only to applicants that were “in operation on February 15, 2020.” Is a business that was in operation on February 15, 2020 but had a change in ownership after February 15, 2020 eligible for a PPP loan?
  • Yes. As long as the business was in operation on February 15, 2020, if it meets the other eligibility criteria, the business is eligible to apply for a PPP loan regardless of the change in ownership. In addition, where there is a change in ownership effectuated through a purchase of substantially all assets of a business that was in operation on February 15, the business acquiring the assets will be eligible to apply for a PPP loan even if the change in ownership results in the assignment of a new tax ID number and even if the acquiring business was not in operation until after February 15, 2020. If the acquiring business has maintained the operations of the pre-sale business, the acquiring business may rely on the historic payroll costs and headcount of the pre-sale business for the purposes of its PPP application, except where the pre-sale business had applied for and received a PPP loan. The Administrator, in consultation with the Secretary, has determined that the requirement that a business “was in operation on February 15, 2020” should be applied based on the economic realities of the business’s operations.

Review of Loans
 
Will the SBA review individual PPP loan files?
  • Yes. To further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Additional guidance implementing this procedure will be forthcoming.

Loan Forgiveness
 
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?
  • No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

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