The news surrounding PPP loans has been increasing steadily in the past few weeks as more businesses apply for forgiveness. The IRS issued additional guidance clarifying their position that deductions related to forgiveness will not be deductible and the SBA is requiring an additional uncertainty questionnaire for loans over $2,000,000.
On this on-demand webinar, our PPP loan specialists discuss the above topics, as well as some further insights and takeaways.
Expand the section(s) below to view the event notes.
The Paycheck Protection Program (PPP) was one of the most popular – and problematic – provisions to come out of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Because it was launched early in the pandemic when there was so much uncertainty, organizations of all sizes, across all industries, for-profit and not-for-profit, applied for the program.
While the idea was well meaning and the loans saved a number of businesses from economic disaster, the program has been riddled with issues, whether it was running out of funding early on or causing confusion with a seemingly endless stream of guidance. Now that borrowers are starting to apply for loan forgiveness, they have more questions.
Baker Tilly Advantage, the firm’s small business practice, recently hosted a roundtable moderated by Todd Bernhardt, partner and practice leader of Baker Tilly Advantage, featuring a team of specialists from different industries who have been working with clients that received PPP loans: Adam Goehring, manufacturing and distribution partner, Tim Kosiek, financial services partner, and Pauline Dumas, tax director. The specialists discussed such issues as the application and submission process, PPP pitfalls, challenges for borrowers of loans of more than $2 million, and the potential for another round of PPP loans.
The two-part loan forgiveness process starts with borrowers submitting their application and supporting data to their lenders, and then their lenders submit their information to the Small Business Administration (SBA).
From Goehring’s experience, the process goes much smoother and faster when the supporting documentation is clear and concisely organized. He said his team has focused on submitting “payroll-only” loan forgiveness applications, which allows lenders to quickly review and approve the application. To date, he has seen approvals from banks come through within one or two days, if not hours. Goehring noted that caution needs to be taken however since coordinating with other tax credits and provisions if using payroll only approach.
The second step – acknowledgment from the SBA – has taken, on average, between 45 and 60 days, Goehring said. On a positive note, for borrowers who received loans of less than $2 million, he has seen a number of for-profit and not-for-profit clients already have notification that their loans were 100% forgiven by the SBA.
On occasion, lenders or the SBA has come back to their clients to ask for clarification or other supporting data, but nothing that is unusual (other than the loan necessity form discussed below).
Pitfall No. 1: application date – The SBA started accepting loan forgiveness applications in August. Since then, the question Dumas has been asked the most by clients is when their application is due with many assuming they are due on Dec. 31. Borrowers actually have until 10 months after their covered period ends, so for those who elected a 24-week covered period, they have until the end of next summer to apply.
Pitfall No. 2: incorrect application form – Another issue that Dumas is hearing about are the number of borrowers electing to use the “EZ” form that are not qualified to do so. When in doubt, lenders will request documentation that proves the borrower is qualified to use the EZ form, including certification that the borrower did not reduce salary wages of any employee by more than 25% and that the borrower did not reduce the number of employees or the average hours paid to employees between Jan. 1 and the end of the covered period. If a lender is unable to certify that information, Dumas recommends filing the full application, Form 3508.
Pitfall No. 3: covered period calculation – Borrowers are also encountering issues in determining their covered period, which is required information for the application process. Dumas said they can calculate that number by taking their funding date plus 55 days, if they have an eight-week covered period, or the funding date plus 167 days for those who elected the 24-week covered period. Borrowers should not rely on the date the lender has listed in its portal, as that may be the promissory note date rather than the funding date. Instead, borrowers should look at their bank statements for the date of deposit of the initial funds.
Pitfall No. 4: consistent employee count – When applying, borrowers will need to have an accurate employee count for the time of application for the loan and for the time of application for the forgiveness of the loan. This number should comprise employees and the owner(s) at the time of application. If there is a variation between the two periods, borrowers should submit documentation to explain why.
Pitfall No. 5: submitted expenses – Some borrowers have considered submitting several different types of expenses with their applications, which could mean hundreds of documents. Dumas said it is unnecessary. With the extension to a 24-week covered period, most borrowers are able to get 100% forgiveness on payroll alone.
Pitfall No. 6: submitted payroll data – Clients have asked if they need to submit data for the entire 24 weeks if the funds were used before the covered period ended. Dumas said lenders have differing expectations, but most seem to prefer payroll data for the entire 24-week period, regardless of when the funds were depleted. Baker Tilly recommends sending in payroll data for all 24 weeks to avoid pushback.
Pitfall No. 7: third-party payroll data – Borrowers should be aware that reports they receive from third-party payroll providers may include ineligible expenses, including long- and short-term disability and certain 401(k) contributions, which should not be used on the loan forgiveness application. Reliance on these reports may seem easy since you can just download them, but their data should not be used alone when completing the loan forgiveness application.
Note: Every month, the SBA changes the expiration date on their Forms 3508 and 3508 EZ. Borrowers should be cognizant of the expiration date on the form they are using; a bank might not accept it if the expiration date has passed. Visit the SBA website to download the most up-to-date versions.
The IRS and Treasury Department recently issued a revenue ruling that said even though the receipt of the PPP funds is tax-free, the expenses that are being forgiven (payroll, rent, utilities, etc.) are deemed nondeductible, creating an indirect taxation of PPP funds.
For borrowers that have a reasonable expectation of forgiveness, their expenses will be nondeductible (i.e., income) for 2020, even if they don’t obtain forgiveness until 2021.
There is a bipartisan effort in Congress to reverse this decision through legislative action because they believe that was not in the spirit of the CARES Act.
Without knowing when or if that reversal will happen, calendar-year taxpayers that usually file on time may want to consider filing an extension for their 2020 taxes.
Fiscal-year taxpayers should reach out to their tax professionals as there is some uncertainty around what to do if their 24-week covered period spans two tax years.
For-profit and not-for-profit organizations that received loans of more than $2 million are expected to complete necessity questionnaires, Form 3509 for for-profit borrowers, and Form 3510 for not-for-profit borrowers (read more). This has been the subject of much discussion and pushback from borrowers and various industry associations throughout the country as the form focuses on what happened to businesses after they received their loans vs. their situation when they applied in the spring (read article from Journal of Accountancy).
Kosiek said a few questions stood out to him, including one asking an organization to compare revenue from a specific period in 2019 to a similar period in 2020. They are asking that at the time the borrower submitted their application that they made a good faith certification that they needed this money. Most companies were uncertain of their future sales when government closures first occurred. Did they have reason to believe their revenue may decline and, if they didn’t, how come they didn’t? Case in point: at the beginning of the pandemic, homebuilders had no reason to believe they would be in demand during this crisis. Instead, people decided to move and interest rates were low, so some have instead been extremely busy. Since they could not foresee the boon, many applied for and received PPP loans. Businesses in that situation should be prepared to articulate what happened in the period after they applied for the loan.
The form also asks about the borrower’s liquidity. Did the organization have other monies available that were readily available, at a reasonable cost and didn’t disrupt the business that could have been used in advance of the PPP funds? The form asks the following questions that were not part of initial loan application considerations: Did the organization pay dividends other than the normal pass-through from a tax standpoint after the PPP money? Did anyone receive compensation over $250,000?
No matter how an organization responds to those questions, the important thing is that they answer them. Bernhardt said the worst thing a borrower could do is ignore that form. He said be truthful in responses because no questions on the form are disqualifying. Companies need to “tell their story” either on the form or with additional documentation that illustrates the uncertainty they were experiencing in April or May 2020.
Organizations that receive a negative response from the SBA have the option to appeal the decision, but to-date the Baker Tilly team has not seen any denied loans (other than fraudulent claims that have been in the news).
Both sides of the aisle in Congress have introduced bills that include some form of additional PPP funding. The eligibility parameters of both plans differ from the original, but they seem to focus on smaller organizations and loans. Timing of such a bill is uncertain, but Baker Tilly is working with AICPA and CPA.com on a solution for its clients when round 2 is introduced.