The Last Word on the Payroll Protection Program… Well at Least in 2020!November 4, 2020

PPP Final 2020

If you are reading this, congratulations on surviving. 2020 is the benchmark of change and chaos highlighting that survival and success favored those prepared. The PPP loan program saw the issuance of more than 4.9 million loans to small businesses around the U.S. Many business owners may be numb about the news and latest revisions impacting this loan program. So, I am not going to spend any time talking about the history, rumors, promises and supposed fixes; rather we will just highlight some key concepts and considerations. Bear in mind, this article is being drafted prior to November 3, 2020. What changes will we see between then and Wednesday, January 20, 2021? This article will not speculate on a subject with such a large margin of uncertainty and unpredictability.

  • 24 weeks – not 8 weeks – that’s your spend period for the funds received. You may spend that on payroll or other qualified expenses like rent and interest. Your mix is 60% payroll and 40% other.
    • A planning point and an option to consider – calculate the full payroll you expended over the 24-week period. If you have enough eligible payroll costs, document that and keep the support for the other charges in case of audit or disqualification of payroll incurred. This sets up a plan B should you need to appeal or provide additional documentation for loan forgiveness.
  • The amount of loan forgiveness is discounted by two calculations. First is a determination if your businesses have less average weekly full-time equivalent employees measured during the applicable periods. Second, the loan forgiveness application will test whether full-time salaried employees absorbed more than a 25% pay decrease during the covered periods. Pass these two tests and you have spent the finding dollars according to thresholds above and the loan is 100% forgiven.
  • What type of documentation is going to be required? Think in the terms that more is best. Each lender will provide their own interpretation of what they wish to see but never hesitate to go beyond. This is not an exercise of limiting scope or questions, rather this is an exercise to overwhelm and eliminate any vagueness of doubt. Build a time capsule in case the Small Business Administration comes calling in the future. Memorialize key management decisions and thought processes, memories fade. Pack it away in a safe space.
    • Paper files versus computer files? It does not hurt to have the company’s source documents for this issue maintained in multiple formats and media.
  • The loan application process will be online with the lender who funded you. Look for announcements that the application submissions are now being accepted. If you are unsure or think you have lost track, call your lender. Keep updating your key financial professionals. Call the accountants or the bankers. Leverage their current experience to ensure timely submittal and completeness.
    • While this statement is self-promotion, you must have your business CPA engaged in this process and provide him timely updates of your usage of funds and forgiveness application process. Allow him time to review and select what’s documented, how much and for when.
  • The loan forgiveness approval clock starts once the lender receives a completed forgiveness application from you. The lender has 60 days to process and issue their opinion on forgiveness to the SBA. The lender has four choices in classifying forgiveness. 1) Approved in Full 2) Approved in Part 3) Denied) 4) Denied without prejudice. While seemingly straight forward, there are two items to be concerned about. An approval in part is a further reduction of the actual amount of the loan forgiven. As an example, your business received $10,000 in funding, because of facts and circumstances you calculate a loan forgiveness amount of $9,000. You indicate that $1,000 should be converted to a loan. Approval in part means the lender is denying an amount greater than $1,000. Maybe they are denying an additional $1,000, so your business would be left with a loan of $2,000. The SBA receives one of the four decisions issued by the lender for your loan and has 90 days to conduct an SBA loan review and then notify the lender of its acceptance of the lender’s classification. However, the SBA may have independently selected your loan for review for audit outside of the loan forgiveness process. If that occurs, the lender must deny without prejudice your application. Until the results of the SBA audit are concluded, the clock stops ticking on your loan forgiveness application.
    • Should loan forgiveness become a dispute, appeals can occur provided the issue is raised in a reasonable period of time. In writing to the lender within 30 days when the lender issues the denial. A subsequent SBA denial, after receiving an approval from the original lender, can be appealed to the SBA’s Office of Hearings and Appeals within 30 days as well.
    • Currently the SBA has not issued guidance on how they will select loans for review. Treasury Secretary Steven Mnuchin has restated his “audit” position to that of a “review” will be conducted for all loans over $2,000,000. What that may entail is speculation today. However, we do know that the Treasury has issued a simplified loan forgiveness application “Form 3508-EZ “for borrowers whose loans are $50,000 or less.
  • If you have not already submitted your loan forgiveness application, you may not receive a determination in time for issuing your company’s year-end financial statements. If that occurs, you cannot anticipate acceptance and therefore must reflect the PPP loan proceeds as a term note, with both short- and long-term portions classified and disclosed in your annual financial statements. Once loan forgiveness is achieved and acknowledged, you will reclassify the debt component of your loan to forgiveness income reported on your statement of operations below the line of income from operations in the reporting period when the loan forgiveness is approved.
    • Review the Financial Accounting Standards Board ASC-470 for technical guidance on presentation and disclosure.
  • As we go to publication, the tax bite for the program is still a certainty. While the proceeds of the loan program are 100% tax free, the salaries and other qualified expenses used in calculating forgiveness are no longer deductible. The IRS notice number 2020-32 clearly requires the reduction of current period expenses for any amounts used to obtain debt forgiveness. The override for this will require an exemption approved by both the House of Representatives and the Senate. Post-election day drama to follow.
  • A tax planning point is raised here as well. When do you want to record debt forgiveness? Do you want to reflect it in 2020 operations? Maybe, maybe not. 2020 tax rates for corporations are capped at 21%. In which year will your company have higher taxable income? What will the tax rates be for 2021? Who will be President? I don’t know.

The prudent approach is to be flexible and prepared. Calculate your loan forgiveness, speak with your lender and review the options with your trusted financial advisor. Stay prepared and stay informed.

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