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October Paycheck Protection Program Updates

October 15, 2020
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In New England, the leaves are changing, there’s a chill outside, and fall is in the air. While the weather may be changing, the SBA and Treasury aren’t making the same dramatic changes or clarifications on the Paycheck Protection Program, and winter is coming. While the program was part of a series of stimulus measures designed to get funds into the hands of small businesses in an effort to keep workers retained, the program went through a metamorphosis in the spring through a series of interim rules, FAQs, and application clarifications. During the summer months, the program remained largely untouched, capped by a release of a set of forgiveness FAQs, but little other guidance. However, as pumpkin latte season approached, we started to see new activity related to this program as follows:

  • The release of the SBA Procedural Notice related to PPP loans and changes of ownership
  • The release of the new forgiveness application form (3508S) for loans under $50,000
  • A new interim final rule related to Loan Forgiveness and Loan Review Procedures (mainly related to the new 3508S form)
  • The release of additional FAQs

While the release of these new guidelines streamlines and clarifies the process related to loan forgiveness for the smallest of the PPP loans and clarifies responsibilities and escrow requirements during a change in ownership, many major questions still remain for the large majority of PPP loan holders which make the coming of winter unusually worrisome. As emphasized in our previous article issued August 18, 2020, the same concerns regarding calculations and tax impacts still exists:

  • The tax deductibility of costs forgiven under a PPP loan remains under the guidance of IRS Notice 2020-32 which reminds taxpayers that the Internal Revenue Code does not allow for a deduction of the amount of expenses that are allocable to tax-exempt income. As we approach year-end tax planning, this is a significant element of taxable income for a number of companies that needs to be considered.
  • The calculation in the application does not clarify whether excess costs (greater than the PPP loan amount) during the covered period can be used prior to the FTE reduction percentage although the new interim final rule does address the concept of excess costs.
  • We continue to have no guidance related to the newest safe harbor requirement related to federally mandated restrictions from HHS, OSHA, or the CDC which can be used to eliminate the FTE reduction percentage.

In addition to these items noted above, PPP loans listed on the financial statements of an organization that are treated under generally accepted accounting principles as loans may impact financial statement covenant calculations. Companies should start evaluating the impact of these loans on their financial statements and prepare for waiver requests or other impacts from these loans.

With all of these uncertainties, we find that patience continues to be top of mind as we hope to see some additional guidance issued by Washington soon. Some companies are filing for forgiveness as they want to leave the program behind them, but in many cases, a wait and see approach might be prudent. At this point, it may be best to start stacking firewood, hunkering down, and waiting for winter to pass. As applications are due 10 months after the end of the covered period, we know that inevitably spring is just around the corner.