Paycheck Protection Loan and CARES Act Updates

By Greg Yoder

In addition to a scary and challenging public health situation, the COVID-19 pandemic has created equally challenging and frightening business and economic concerns. Both we and our clients have been spending much time and effort trying to navigate a rapidly changing and unstable environment.

The most common questions we’ve been receiving have centered around the recent CARES Act in general, and the Paycheck Protection Program (PPP) loans and loan forgiveness provisions in particular.

Although the SBA has already run through all of the funds originally earmarked for PPP loans in the CARES Act, another $310 billion of PPP loan funding has just been passed by Congress and signed into law. Businesses who missed out on the first tranche will have another bite at the apple. And for businesses that have already secured PPP loans, the work is just beginning. The CARES Act was definitely welcome and provided much needed relief, but the legislation itself raised nearly as many questions as it answered, and additional guidance has been coming out on a weekly or even more frequent basis.

With the understanding that what we think Treasury or the SBA means today might be “clarified” by what they say tomorrow, here’s a sampling of some of the most important items that we know now.

PPP Matters

With respect to PPP loans, most businesses have two main concerns: a) maximizing the amount they can borrow under the program, and b) maximizing the amount of the loan that can be forgiven. Fortunately, the actions you can take to optimize the first will also help to maximize the second. Key things to keep in mind:

  • Understand the requirements. The requirements for PPP expenses are complex — and substantially more stringent than general requirements for deductibility under tax law. In order to make sure you get the most forgiveness possible, you will have to consider:
      • Allowable expenditures. Payroll will make up the bulk of your PPP expenditures (non-payroll costs cannot be more than 25% of total expenditures). But payroll costs themselves are limited and what is and isn’t included is not always immediately obvious. For example, gross wages are included, but they’re limited for more highly compensated employees. The employer portion of federal payroll taxes are not considered payroll costs. Some benefits (e.g., health insurance) are included in allowable payroll costs; others aren’t. When you move to non-payroll costs (mortgage interest, utilities, rent), there are further restrictions to consider.
      • Timing of expenditures. Typically, loan forgiveness will be limited to the amount of allowable expenditures made during the eight weeks beginning with the date the business receives the loan proceeds. You’ll need to plan to make sure that you incur and pay sufficient expenditures within that time frame. In some cases, this may mean pre-paying allowable items (such as the employer portion of retirement plan contributions, which under normal circumstances would not be paid until the following year). Unfortunately, we don’t yet know whether pre-payment of many expenses will be allowed; we’re awaiting additional guidance on this issue.
      • Staffing levels and compensation. While some businesses may feel it advisable to reduce the number and/or compensation of staff in order to survive the economic downturn, it’s important to keep in mind that such reductions may reduce the amount of loan forgiveness. Here again, the rules are complicated, and there are exceptions. For example, employees who make more than the $100K/year allowed under the PPP can generally have their compensation cut (but not below the $100K limit) without reducing loan forgiveness; reducing the compensation of employees who make less than $100K/year generally will reduce loan forgiveness, however. Temporary reductions in either staffing levels or staff compensation typically will not reduce loan forgiveness if the reductions are restored by June 30, 2020.
    • Keep scrupulous records. Although the specific documentation and forms SBA will require for loan forgiveness are not yet known or available, it’s clear from what we’ve seen in the loan application process that you’ll need to be able to demonstrate that amounts were expended on allowable and forgivable expenses within the permitted time frame in order to maximize loan forgiveness.
    • Open a separate account for PPP proceeds and expenditures. One way to avoid having some of your loan forgiveness disallowed is to put PPP loan proceeds into a separate account and then pay only amounts that are clearly allowed under the program from that account. For example, many businesses have employees who earn more than the $100K per year that’s permitted to be funded and will want to continue to pay those employees their full salary. In these cases, employers may want to pay the forgivable portion from their PPP account and the rest from another account. Maintaining a separate PPP account avoids the possibility of commingling funds and reduces the possibility that some expenditures won’t qualify for loan forgiveness when the forgiveness application is eventually submitted.

    There are still a number of unresolved issues associated with the PPP. Because the early focus has been on getting loan applications approved, a number of items associated with the mechanics and processes for loan forgiveness remain open. One of the biggest open issues is whether expenses paid with PPP funds will be non-deductible to the extent the loan is forgiven. Other questions that we continue to monitor include state taxation of loan forgiveness, treatment of amounts paid to related parties, and certain issues regarding payroll costs for owners of pass-through entities. Stay tuned.

    Other CARES Act and COVID-19 issues

    IRA distributions

    Under normal law, taxpayers who are at least 72 years old as of the beginning of the year are required to take at least a certain amount of distribution from their IRAs (the RMD: required minimum distribution). CARES waived the RMD for IRAs for 2020. Taxpayers who have already taken a 2020 distribution can discuss the potential for undoing the distribution with their IRA custodians. Financially, it may make sense for taxpayers to take a distribution even though it’s not required this year. Additionally, depending on your individual tax situation, you may want to consider taking advantage of a Roth conversion or a qualified charitable distribution (QCD) from your IRA.

    Due dates

    Taxing authorities are continuing to update due dates for returns and estimated tax payments. The IRS has deferred the due dates for 2019 returns and 1st and 2nd quarter estimated tax payments to July 15. Maryland has conformed its due dates to follow the federal deferral, but some states have not. At least yet: as with everything else COVID-related, every week brings many new developments, and we are monitoring the situation closely to keep abreast of what is due when.

    We’re sure that you have other questions and concerns, and we want to hear them. Snyder Cohn is here to assist you with all your financial and tax needs. Assisting businesses in transition is what we do, and that’s especially true in times like these, when everyone is going through more transition than they ever wanted or expected.