By now most of you have received PPP loans and many of you have spent the PPP money. Now it is time to start planning and working on the loan-forgiveness application process and procedure. This newsletter will give you an update you on this process, which has changed since the Paycheck Protection Program was first launched, and frankly, can be a bit confusing.

The Cares Act was enacted on March 27, 2020. Part of the Cares Act created the Paycheck Protection Program (PPP) loans.  As you well know the PPP loans are 100% forgivable, provided the borrower (you) meets the criteria as outlined in the Cares Act and as amended in the Flexibility Act, which was passed on June 3, 2020. Initially, the SBA mandated that 75% of the loan be spent on “payroll costs” and it had to be spent within 8 weeks of receipt of the loan. When Congress passed the Flexibility Act which changed the payroll costs ratio to 60% and lengthened the allowable spending period to 24 weeks. Also, the deadline to apply for forgiveness was extended to 10 months from date of loan receipt.

So now under these new expanded SBA criteria rules, in our opinion everyone should expect to qualify for 100% forgiveness. There are certain stipulations and limitations on how much can be paid to the owner and certain highly paid employees. However, given the fact that the initial PPP loan was based on 2.5 months of payroll, no one should have any troubles at all in spending 60% of the loan funds over a 24 week period on payroll costs. The only remaining challenge, then, is provided the required documentation. There are specific forms to fill out and various documents will be accepted by the SBA.

Lastly, there is one more thorny tax issue concerning the deductibility of expenses that are paid with PPP loan funds. As it stands the IRS has issued Notice 2020-32 disallowing expenses paid with PPP loan funds based on the premise the expenses were paid with “tax exempt income.” If this Notice is allowed to stand taxpayers will face an unintended tax liability when filing 2020 tax returns. This was not the intent of Congress and hopefully this Notice will be overridden.

The SBA has published statistics that show 87% of the PPP loans were for less than $150,000, and 95% of loans were under $350,000. There is talk that Congress will pass another round of PPP amendments including more PPP loan money and a proposal that will provide for “automatic loan forgiveness” for all loans under either $150,000 or $350,000. One reason for this is that the SBA simply does not have the manpower to review and audit all the PPP loans.

As of August 8^th, the SBA is now accepting applications for PPP loan forgiveness, however there is no need to rush since the deadline is 10 months from the date of loan receipt. In our opinion, it only makes sense to apply for forgiveness prior to the expiration of the 24-week covered period if you have already spent 100% of your PPP loan proceeds.