We are committed to keeping you up-to-date with news about the Paycheck Protection Program (PPP). On November 18, 2020, the Internal Revenue Service (IRS) issued a Revenue Ruling (2020-27), a Revenue Procedure (2020-51), and added two Frequently Asked Questions (FAQs) which address PPP issues. The Revenue Ruling (Rev. Rul.) and the Revenue Procedure (Rev. Proc.) answer questions concerning the income tax consequence of the loan forgiveness feature of the PPP, and the FAQs (81a and 81b) address the interaction of the PPP loans and the Employee Retention Credit (ERC) in the event of a merger or acquisition.
Questions That Come to Mind:
Although the CARES Act had explicitly defined the PPP loan forgiveness as “excluded from gross income” that statement created much confusion in the tax professional community. If the forgiveness is “excluded from gross income,” what happens to the qualified expenses that the loan proceeds paid in order for the borrower to qualify for forgiveness? Should they be deductible if paid from “excluded income?” What should the timing be for reduction of expenses? Is the timing tied to the loan forgiveness being finalized, or is it addressed in the period when the expenses were paid with the “excluded income?”
The Rev. Rul. and the Rev. Proc. bring some clarity and to the questions listed above. If the PPP borrower can reasonably expect that they will receive forgiveness of the PPP loan on the basis of the qualified expenses which were paid or accrued during the appropriate “covered” period, then they may not deduct those expenses in the year in which they were paid or accrued. Obviously, this is a calendar year 2020 concern. For those ATLAS clients who are reporting on a fiscal year basis, your ATLAS team will apply the Rev. Rul. and the Rev. Proc. guidance to the appropriate fiscal period. By the way, the Rev. Proc. does provide a safe-harbor provision in case the forgiveness application is denied in whole or in part.
Year-End Planning Impacts:
Now, with clarity as to timing issued by the IRS, we at ATLAS can more confidently provide you with advice on year-end planning concerns. We cannot ignore, however that there is still pending legislation on this specific issue: the disallowance of expenses paid with the PPP loan proceeds. On November 19th, 2020, two US Senators (Grassley, R-IA and Wyden, D-OR) criticized the Treasury Department for the above-referenced Rev. Rul. and Rev. Proc:
Since the CARES Act, we’ve stressed that our (Legislative) intent was for small businesses receiving (PPP) loans to receive the benefit of their deductions for ordinary and necessary business expenses…We explicitly included language in the CARES Act to ensure that PPP loan recipients whose loans are forgiven are not required to treat the loan proceeds as taxable income…”
Both Grassley and Wyden are cosponsors of Sen. John Cornyn’s (R-TX) bipartisan Small Business Expense Protection Act (S. 3612) which would clarify congressional intent. In other words, this may not be a settled issue, depending on the potential actions of Congress and the Administration.
At ATLAS, we are being contacted daily for assistance in preparing the PPP Loan Forgiveness Applications (Form 3508, 3508EZ, and 3508S). Although we have provided this information previously, we felt it was prudent to bring to your attention the documents you should be prepared to present with the Forgiveness Application:
- Payroll reports (self- or third-party- prepared) with bank statements to support the payment of the payroll and related taxes, related payroll tax forms, and documentation of hours worked from one of the following reference periods (2/15/2019-6/30/2019 OR 1/1/2020-2/29/2020 for most businesses, but 12 consecutive weeks from 5/1/2019-9/15/2019 for seasonal businesses).
- The payroll reports (both current and for the comparison period) must include not only the listing of the dollars paid, by employee, during the periods listed above, but ALSO must include the hours worked associated with the employees’ pay for both the “covered period” and the comparison base period
- If the information could be presented in an Excel format, that would be most helpful to the process. If you use a third party vender, please ask them to provide the data in an Excel format.
- Documents supporting the payment of health benefits paid on behalf of employees during the “covered” period
- Documents supporting retirement contributions paid on behalf of employees during the “covered” period
- For non-payroll costs:
- Copy of your current lease agreement
- Rent payments – cancelled checks or bank records reflecting the payments during the “covered” period
- Mortgage interest expense during the covered period, including the loan amortization schedule and cancelled checks
- Utility bills and proof of payment for utility bills incurred or paid during the “covered” period
If you have any questions, please do not hesitate to contact us here. We are always here to Listen and Serve! Stay tuned for additional information as it comes out.