UPDATE: FEBRUARY 26, 2021

As of today, Maryland, Pennsylvania, and West Virginia all have confirmed that PPP loan proceeds are tax exempt, and PPP loan expenses are allowed as deductions. Virginia has not yet decided on how they are going to treat it.

UPDATE: NOVEMBER 19, 2020

The IRS issued guidance on November 18th, 2020 indicating that companies receiving or expecting to receive forgiveness of PPP funds will not be able to deduct the expenses used on their forgiveness application on their 2020 tax returns. Essentially, unless Congress acts to direct otherwise, all forgiven PPP funds WILL be taxable on 2020 tax filings. See the specific IRS direction below:

Companies that have received Paycheck Protection Program loan forgiveness or have a reasonable expectation that the government won’t require them to pay back the money can’t deduct the business expenses paid for by the loan, the IRS provided November 18. Expenses subject to this rule are contained in CARES Act Section 1106 and include payroll costs, mortgage interest, utility payments, and rent. The IRS expanded on the guidance in Notice 2020-32 that disallowed deductions under tax code Section 265 by bringing in a reasonable expectation of forgiveness standard. The fact that the tax-exempt income may not have been accrued or received by the end of the taxable year does not change the result because the disallowance applies whether or not any amount of tax-exempt income in the form of covered loan forgiveness and to which the eligible expenses are allocable is received or accrued, the IRS stated. Submitting a loan forgiveness application makes loan forgiveness foreseeable, the IRS concluded. A taxpayer that incurred covered expenses in 2020 but will wait until 2021 to submit a loan forgiveness application is also subject to the disallowance rule, the IRS determined. [Rev. Rul. 2020-27, 2020-50 I.R.B. __ (Dec. 7, 2020)]

 

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UPDATE: SEPTEMBER 2, 2020

To our valued clients:

We would like to update everyone on SEK's activities and expectations regarding PPP loan forgiveness engagements.

First and foremost on timing and the changes that are still occurring and pending in Congress - As recently as 8/24/2020 the US Department of Treasury issued rules clarifying the eligibility of certain expenses.

Specifically, the latest round of rules dealt with related party rents, making them eligible for forgiveness ONLY TO THE EXTENT of underlying mortgage interest. In addition, the new rules clarify that owner compensation caps do not apply to owner-employees with less than a 5% ownership stake in a C or S Corporation.

Needless to say, these are big changes, and will affect many of our clients.   

Changes still being considered (described here) include:

• Applying a single certification for 100% forgiveness for loans under $150,000 vs. requiring them to complete a detailed application
• For borrowers between $150,000 and $2 million, allowing the ability to file applications without submitting supporting documentation

Other proposals include:

• A third PPP (future) program providing funding equivalent to a business's first PPP loan provided the business can prove a threshold reduction in YTD 2020 revenues vs. 2019
• Expanding allowable expenses eligible for forgiveness
   

All of this stated, SEK has assembled a team of PPP forgiveness professionals that continue to stay active in the following ways:

• Continuing to study the ongoing changes issued by US Treasury
• Collaborating with other professionals on best practices regarding forgiveness applications
• Meeting as a PPP team to share knowledge ensuring a consistent firm-wide application of the rules
• Beginning to preliminarily prepare smaller forgiveness applications in early September which will
  • Allow our PPP team to raise and clarify questions
  • Ensure consistency across the firm
  • Allow continued knowledge sharing across the PPP team
  • Improve the efficiency of the application process over time

 

We suggest that all clients wait to submit forgiveness applications until later in September or October, giving our team time to become comfortable that we have a consistent and accurate forgiveness “model.” In addition, many clients could benefit by pending legislation that could reduce the overall effort in assembling and submitting documentation with the forgiveness applications.

Finally, please remember that any forgiveness application assistance (outside of a short answer or interpretation of rules) will require a signed engagement letter. Clients and SEK team members should ensure that we have the signed letters on file and that you have communicated such to our PPP team leaders.
 

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JULY 2, 2020

To our clients:

We are formalizing a Paycheck Protection Program Forgiveness Team of our experts to handle firm-wide review of forgiveness applications and disseminate current information on the forgiveness process. 

Below is a summary of the process and timeline we plan to follow:

During the month of July we will:

• Review the latest PPP regulations and forgiveness rules
• Monitor the ever-changing political and legislative arena relative to PPP and the forgiveness process
• Participate in webinars and other professional forums to gain mainstream understanding of forgiveness best practices

During the month of August we will:

• Monitor the ever-changing political and legislative arena relative to PPP and the forgiveness process
• Disseminate PPP forgiveness best practices
• Guide our clients in the most efficient application practices
• Provide current expectations for documentation for forgiveness applications
• Assist our clients in compiling, organizing, and reviewing forgiveness data

During the months of August and September we will:

• Assist the majority of clients who engaged us to assist in PPP forgiveness applications to file for forgiveness
• Continually stay abreast of changes to the regulations
• Assess whether changes in political and legislative areas require a further extension of this timeline

We understand that many clients would like to fast-track the process and get the forgiveness application filed. We are also aware that many recent changes have:

• Reduced forgiveness requirements,
• Provided the ability to spend the full amount of the funds more easily (by providing 24 weeks to spend the funds), and
• Stated that applicants have 10 months to file for forgiveness from the end of the covered period.

We believe these extended time frames support a systematic approach, allowing us to keep both your and our time to a minimum and leverage the easing burdens. 

Additionally, the U.S. House and Senate have approved to extend the PPP application window to August 8th. The bill awaits the President’s signature, and we will update as we gather more information.

Please reach out to your Client Relationship Manager with any questions. 

Thank you and have a nice holiday weekend!