On March 27, 2020, the Paycheck Protection Program (PPP) was introduced as the primary stimulus for small businesses in response to the economic effects of the COVID-19 pandemic. The program ultimately received $659 billion in funding from the Small Business Administration (SBA).
Small businesses across the country were eligible for loans of 2.5 times their average monthly payroll, up to $10 million dollars, with 100% of the loan eligible for forgiveness, assuming the issued criteria was met. Information on this criteria can be found at our COVID Resource Center. Initial fears surrounding the loan forgiveness guidelines were quelled by the PPP Flexibility Act of 2020, which relaxed a number of the loan’s requirements.
In order to receive loan forgiveness, small businesses (500 or less employees) are required to submit an application declaring the usage of PPP funds. To earn full forgiveness, small businesses must have spent at least 60% of the loan proceeds on payroll costs and the remaining 40% on other allowed expenditures. The original eight-week period used to determine potential forgiveness was extended to 24 weeks, thus allowing businesses an extended period in which they can spend and record the usage of funds. Current IRS guidelines indicate that proceeds from the loan that are used to pay expenses (i.e. rent, payroll) are not deductible. Lobbyists and lawmakers are working to eradicate this stipulation, but there is no guarantee. Guidance is regularly updated, and we will likely see further updates in the near future.
If payroll costs are included in a company’s application for forgiveness, and the current regulations are not modified to allow those costs to be considered deductible, some eligible credits could be impacted. For the Research and Development (R&D) tax credit, otherwise qualified payroll expenses would not be considered a Qualified Research Expense (QRE) for purposes of the credit if forgiven. Similar limitations could exist for the Work Opportunity Tax Credit and other payroll related credits such as the Employee Retention Credit – without deductible payroll, the well of qualified expenses for these credits begins to dry up, and there is no ability to use the same expense for multiple credits.
Given the current uncertainty as to whether the expenses associated with the loan forgiveness will be allowed as deductions for tax purposes, VonLehman professionals are advising clients to closely review their allocations of expenditures for purposes of tax credits. In some cases, the approach of using as much of the loan as possible for payroll related costs may not be the most tax-advantageous approach. Additionally, current guidance is absent of any requirements demanding even distribution of funds across payroll, therefore, there may be potential to allocate the loan funds to specific non-credit eligible employee payroll, assuming the business incurs adequate other non-credit-eligible payroll costs to absorb the PPP loan amount.
For fiscal year filers who have received PPP funds but are yet to apply for loan forgiveness, technically the costs are still deductible, and there is no impact to credit-eligible expenses at this time. However, absent a change in guidance or regulations, in the instance a business elects to file taxes prior to receiving forgiveness, credits and the related eligible expenses are not initially impacted; an amended return may be warranted once the loan is forgiven, if the proceeds were used to pay wages for those associated expenses and the regulations haven’t changed.
Therefore, jumping to apply for forgiveness or quickly filing associated tax filings may not be the best approach – we recommend businesses extend their tax filings in hopes of receiving additional guidance. We also advise our clients to hold off on filing for loan forgiveness, and consult with their advisor for recommendations of the most tax-advantageous approach for their specific situation. In some cases, a review of the forgiveness application may also be recommended prior to submission.
For any questions relating to PPP loan forgiveness, contact Senior Tax Manager, Victor Evans, at firstname.lastname@example.org or 800.887.0437.