OUTDATED: Congress passed the Flexibility Act that changed many of the rules below. See this post.
Borrowers receiving PPP loan funds under the CARES Act have until May 14, 2020 to return those funds, without penalty, if they no longer qualify for the funds or no longer want them. How might a previously qualifying small business no longer qualify? Why would a small business want to return PPP money subject to loan forgiveness?
- If the business cannot certify and demonstrate that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
- Borrowers must now making this necessary showing, taking into account current business activity and access to other sources of liquidity sufficient to support ongoing business operations in a manner that is not significantly detrimental to the business.
- SBA intends to review existing loans for this purpose upon submission for loan forgiveness, but only loans in excess of $2 million. Loans for less than $2 million will be presumed to have been necessary (UPDATED 5/14/20).
- Disallowance of tax deductions for expenses paid with PPP loan funds.
- The IRS is not allowing expenses to be deducted from the gross income of a business, if the expenses were subject to PPP forgiveness. The CARES Act intent was to allow a double tax benefit, but the text of the CARES Act neither supports nor contradicts the IRS’s interpretation. This interpretation reduces the tax benefits of a PPP loan by subjecting loan forgiveness expenses to taxes of approximately 30-40% of the forgiven loan proceeds, depending on the business’s tax bracket.
- Disallowance of CARES Act employee retention credit and PPP loan forgiveness for the same employee costs.
- Under the CARES Act, employers can receive a fully refundable tax credit for 50% of wages and qualified health plan expenses paid to employees retained during the COVID-19 pandemic (3/12/20 – 12/31/20). The total allowed credit per employee is $5,000 (on $10,000 in wages and qualifying health plan expenses). This credit is only allowed if the employer: (a) fully or partially suspended operation during any quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or (b) experienced a “significant decline” in gross receipts during a quarter.
- If the employee expenses forgiven during the 8-week PPP loan forgiveness period are not expected to be greater than the CARES Act retention credit, the retention credit may be a better option.
- Additionally, if an employer is denied forgiveness under the PPP loan program, the employer will not be permitted to rely on the CARES Act employee retention credit as a back up.
Employers should work with their tax and legal advisors quickly over the next three days to make decisions regarding PPP loan funds.