The information age has been rapidly transforming the way that we consume information. Published articles, social media, network news, and online news sources hit us from various sources. Our cellphones, our computers, our smart watches, all feed us information that we need to sort through, process, and make determinations related to items that impact our businesses. Many of these articles have been focusing in on the Paycheck Protection Program and the forgiveness provisions relating to the same. While the CARES act was signed into law on March 26, 2020, further enhanced by the Paycheck Protection Flexibility Act signed into law on June 5, 2020, and the time in between peppered with FAQs and interim final rules clarifying provisions of the law, the past few weeks have been largely silent to changes in the provisions of the program. The first FAQs related to forgiveness were released on August 4, 2020, but they still leave many unanswered questions. One may interpret this silence to mean that now is the time to file for forgiveness, but based upon this program’s history and uncertain terms, we believe that now is the time to gather your information and document your support, but may not yet be the time to apply for forgiveness on account of the following:
1. The tax deductibility of costs forgiven under a PPP loan has not been clarified.
In early May, the IRS released guidance about the deductibility of expenses for taxpayers who receive loans under the Paycheck Protection Program (PPP). While the CARES Act (P.L. 116-136) provided for tax-exempt treatment of the amount of loans forgiven, it did not address whether deductions for expenses associated with the loan forgiveness would still be allowed. IRS Notice 2020-32 provides a reminder that the Internal Revenue Code does not allow for a deduction of the amount of expenses that are allocable to tax-exempt income. This also applies to tax-exempt income that is earmarked for a specific purpose and the deductions that are incurred in carrying out that purpose. The interrelation between the amount of tax-exempt income from forgiveness of a PPP loan and the amounts paid for eligible expenses is sufficient to disallow deduction of these expenses.
The Notice concludes that the deductibility of payments of eligible expenses that result in the forgiveness of a PPP loan must be disallowed, consistent with the Internal Revenue Code, prior case law, and published rulings.
While this may not have been the intent of the stimulus portion of the CARES Act, legislation regarding this issue has not yet been released. Therefore, other tax provisions, tax planning, and other potential credits may be impacted by which expenses you choose to use in applying for forgiveness. With the expansion of the covered period from 8 to 24 weeks, and the available non-payroll cost use percentage increase to 40%, there is more opportunity for planning associated with forgiveness as it relates to your tax position for which we require more guidance.
2. The calculation in the application does not clarify whether or not your reduction in forgiveness for a reduction in FTEs is limited to the maximum amount of the PPP loan.
With the release of the application and the EZ application for forgiveness in conjunction with the expanded covered period option for loans entered into prior to June 5, 2020, there are many additional questions related to forgiveness which have not yet been addressed. Utilizing the pure mathematical mechanics of the application, it appears as though one might be able to achieve enough expenses during the covered period that even a 50% FTE reduction would allow for 100% forgiveness. We have not seen any guidance specifically addressing whether the calculation of covered expenses during the 24-week period must be limited to the amount of the PPP loan. The application allows for the lesser of the calculated amounts or the PPP loan to flow through as the forgiveness amount.
3. Cost reimbursement contracts have not been addressed with regard to eligibility for non-profits and other governmental contractors for costs which ultimately are forgiven.
Similar to the tax impacts, cost reimbursement contracts for which the cost is actually borne by the Federal Government through loan forgiveness may cause certain costs to be disallowed for reimbursement and no additional guidance has been released related to nonprofits regarding this issue. This may impact your ability to apply for reimbursement under certain contracts if you choose to include certain costs rather than others in your application for forgiveness. Spending more time and spending more qualified covered expenses may allow you to maximize or choose between counting certain expenses for forgiveness over others.
4. The latest safe harbor FTE requirement related to federally mandated restrictions from HHS, OSHA, or CDC for which there is no additional guidance.
There may be instances where a state mandated law or rule is not flowing through from the federal laws and therefore businesses may not know or may unknowingly believe that they qualify for this exemption, but are actually unable to achieve a return to their FTE count based upon a State regulation rather than a federal regulation. Additional guidance may be required for you to determine if you would qualify for this particular exemption or may allow you to qualify for this exemption depending upon the course of the virus and its impact now or in the future on your FTE count.
5. The release of prior interim final rules and FAQs has changed the program dramatically during the time period from the enactment of the CARES Act until today.
With the release of certain FAQs (FAQ #31 for example regarding necessity), interpretations of the impact of these FAQs on loans and eligibility has been akin to watching a tennis match. While the rules may swing at one time in favor of additional forgiveness on your application, it is quite possible that they could swing to unfavorable and back again to favorable. Only time will tell, but making a decision on filing for forgiveness appears to be a better decision when you are armed with more information.
However, while you wait patiently for guidance that may or may never come, you are running up against the deadline of applying for forgiveness. In order to best arm yourself to make the best decision possible, it is important that you have your forgiveness game plan in place.
To help you navigate through PPP challenges, Citrin Cooperman has developed a Paycheck Protection Program Forgiveness Guide which provides an overview of the process that you can start today with timelines available to help you through the PPP forgiveness application process.
Citrin Cooperman is a nationally recognized, full-service CPA firm, currently ranked in the U.S. top 25. The firm offers assurance, tax, and business advisory services to help clients remain competitive in today’s market.
Mitzi Hollenbeck is a partner in Citrin Cooperman’s Providence office. She has over 15 years of experience providing accounting and audit services, tax planning, business consulting, and forensic services.
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