Baker Tilly has carefully reviewed every aspect of the CARES Act and the Paycheck Protection Program (PPP), including the specific rules surrounding loan forgiveness. We are pleased to share with you a concise summary of answers that we have at this point to your questions regarding the PPP’s loan forgiveness.
1. What is the cap on the loan forgiveness?
- Per the CARES Act, Section 1106(d), the amount forgiven may not exceed the principal of the loan.
- Subsequently, the Interim Rules (paragraph 2(o)) state that the amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest.
- It appears that there is the opportunity to have accrued interest forgiven; however, we are awaiting further clarification on how the forgiveness of accrued interest will work.
2. Do I have to segregate my PPP funds?
- While there is no formal requirement, we believe that it is a best practice to segregate the funds received in order to facilitate and simplify the tracking and documentation required for substantiate loan forgiveness. We understand some lenders are discouraging such separation at the time of distribution of proceeds in the interest of timing. Although specific bank account segregation is preferred, in instances in which that is not practical, segregation in the company books and records in recommended.
3. Will I receive a tax deduction for the payroll, rent, utilities and interest that my loan forgiveness applies to?
- This is a significant unknown and we are awaiting further guidance and clarification.
Update as of April 30, 2020: The IRS has issued Notice 2020-32 which takes the position that expenses which are forgiven under the PPP provisions are not deductible under IRC Sec. 265. It is unknown however if any favorable Congressional clarification is forthcoming with regards to this determination.
4. The CARES Act states that my loan forgiveness is tax-free for federal purposes, but will it be tax-free for state purposes?
- This is a significant unknown, and we are awaiting further guidance and clarification. Our initial interpretation is that each state will have to separately conform to the federal treatment, which will require states to pass specific conformity laws. Due to this uncertainty, to be conservative, we would advise PPP loan recipients to plan on incurring state tax on the loan forgiveness.
5. If I am a partnership or S corporation, how will my tax basis be impacted?
- Since the debt is non-recourse, it would not provide any basis for at-risk purposes to partners. It should provide basis to partners in their partnership’s interest for distribution purposes only; however, it should not provide basis for loss utilization purposes.
- This should be a non-issue for S corporations, as non-shareholder debt cannot increase shareholder basis.
6. What interest expense qualifies to count towards loan forgiveness?
- Section 1102 of the CARES Act states that “interest expense related to covered mortgage obligation (related to real or personal property)” and “interest on any other debt obligations that were incurred before the covered period” are allowable uses of the PPP funds.
- Section 1106 of the CARES Act, which details the items eligible for forgiveness, omits “interest on any other debt obligation” as an expense qualifying for forgiveness.
- It appears Congress will allow a borrower to use the funds to pay interest on a non-mortgage debt during the covered period, but won’t allow a borrower to have that amount forgiven.
- We all hope that there is more to come clarifying this inconsistency.
7. What is meant by the language in the Interim Rule that says I have to use 75% of loan proceeds on payroll costs?
- The language in the Interim Rule has caused confusion related to the requirement for loan forgiveness. It is our viewpoint that this 75% of loan proceeds test applies to all loan proceeds, even after the forgiveness period has ended. For example, if a PPP loan recipient received a $500,000 loan and qualified $300,000 for forgiveness, it would be required to use 75%, or $150,000 of the $200,000 loan, on payroll costs in the future. As with the other items on this list, we await clarification on this situation.
8. Do I have to pay qualified expenses during the eight-week period after I get the funds, or can I just accrue them?
- The CARES Act notes that “costs incurred and payments made” within the eight-week period will be forgiven.
- This language leaves the door open for different interpretations.
- We are awaiting further guidance and clarity on the requirements to pay, and/or accrue qualified expenses.
9. How do I track and count headcount related to the reduction in loan forgiveness?
- Section 1106(d)(2)(A) creates a requirement for forgiveness that the employee headcount of a PPP loan recipient must be retained in full to maximize forgiveness.
- Within this section, there is reference made to “Full-Time Equivalent Employee.”
- It appears that any employee working over 30 hours in a week counts as a full-time employee.
- Additionally, it appears that employees working less than 30 hours must be aggregated to create a full-time equivalent (FTE) employee. For example, three part-time employees working 10 hours each would be combined to create one FTE.
- Further guidance and clarification are necessary to confirm this interpretation.
10. If I get a PPP Loan, am I prohibited from taking advantage of any other tax-related items from the CARES Act?
- If you are a recipient of a PPP loan, you cannot utilize an employer retention tax credit.
- However, you do have a limited window to utilize the payroll tax deferral.
- For more information, please see FAQ No. 4 recently posted by the IRS.
As you can see, there are still uncertainties surrounding the PPP and its loan forgiveness component. Because of these uncertainties, Baker Tilly has created a loan forgiveness tool/calculator to assist with modeling the various scenarios you are considering as a PPP recipient, and how those business decisions may impact your loan forgiveness.
One of the primary lessons of the current climate is that we all must get through this together. With that in mind, as you navigate the nuances of the PPP, please consider reaching out to Baker Tilly for assistance with your specific situation. We created our loan forgiveness calculator for companies just like yours. With a focus on your needs, we will get through this together.
For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.
For borrowers with a straightforward PPP loan compliance environment, we have developed a self-service, Excel-based loan forgiveness calculator. But if your situation is more complex, or you have limited staffing available to support the loan requirements, we can provide an automated approach to forecasting eligible spend, monitoring specific payroll exceptions, and managing compliance with final documentation requirements.