On Friday, May 22, 2020, the Small Business Administration (“SBA”), in conjunction and consultation with the U.S. Department of the Treasury (“Treasury”), published an interim final rule (“IFR”) containing new guidance on the treatment of bonuses, prepayments, and the loan forgiveness application and process for Paycheck Protection Program (“PPP”) loans.
Loan Forgiveness Process
Loan forgiveness under the PPP is not automatic. Rather, borrowers must apply for forgiveness using the SBA’s Loan Forgiveness Application (SBA Form 3508) or their lender’s equivalent form, if any. The process is somewhat streamlined:
- The application is submitted to the lender for review and approval.
- The lender will review the application and make a decision regarding loan forgiveness.
- The lender has 60 days from receipt of a complete forgiveness application to issue a decision to the SBA.
- The lender is responsible for notifying the borrower of the amount approved for forgiveness.
- The lender will then request that the SBA repay the amount forgiven.
- Within 90 days from the lender’s request for payment, the SBA will pay the lender the amount forgiven, plus any accrued interest. (If applicable, the SBA will deduct the amount of advances under the Economic Injury Disaster Loan program from its payment to the lender.)
In addition to worrying about keeping their business afloat these days, businesses are focusing on whether their Paycheck Protection Program (“PPP”) loan will be forgiven. Without loan forgiveness, many of these businesses will not survive. Consequently, the stakes are high!
The eligibility requirements for PPP loan forgiveness are complex. As we discussed previously, in large part, loan forgiveness is based on the borrower using the loan proceeds within the eight-week period immediately following receipt of the loan on specified expenses, including payroll and rent.
Some landlords have been generous enough to reduce or even abate rent for a period (e.g., three months) to assist the tenant in salvaging its business. Consequently, these businesses may have little or no rent to pay during the eight-week period. If a business owner asks the landlord for advice on what to do in this situation, the landlord will likely say:
Love thy landlord – pay me anyway!
Whether the prepayment of rent (or the payment of rent for a period preceding the eight-week period) applies for purposes of the loan forgiveness computation under the PPP is likely a question being pondered by many businesses and their advisors.
As discussed in recent blog posts, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the Payroll Protection Plan (“PPP”) under which the U.S. Small Business Administration (“SBA”) was authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments. On April 24, 2020, Congress increased the amount of available funds under the PPP to $659 billion when the Paycheck Protection Program and Health Care Enhancement Act was signed into law.
The PPP legislation and the administrative rules promulgated thereunder are plagued with numerous unanticipated defects. One of the defects in the PPP, as rolled out by the federal government, may be the death of small businesses, including restaurants.
New guidance from the Oregon Department of Revenue (the “DOR”) with respect to Oregon’s Corporate Activity Tax (“CAT”) was issued yesterday.
Specifically, the DOR announced that:
- Certain forgivable federal loans and advances, including Paycheck Protection Program (“PPP”) loans, are excluded from the definition of commercial activity under the CAT;
- The DOR is scheduling a public hearing to discuss the first set of permanent rules promulgated under the CAT; and
- The DOR released a draft temporary rule regarding the sourcing of commercial activity for financial institutions.
Last week, we reported that the IRS issued Notice 2020-32, wherein (relying primarily on Code Section 265) it emphatically pronounced that taxpayers receiving Paycheck Protection Program (“PPP”) loans do not get to have their cake and eat it too! As a result of the notice, if a taxpayer’s PPP loan is forgiven and, in accordance with the CARES Act, has no cancellation of debt income as he/she/it would otherwise have under Code Section 61(a)(11), the taxpayer cannot deduct the business expenses for which it used the forgiven loan proceeds.
As we explained last week, the government’s conclusion, from a purely academic perspective, makes some sense. In normal times, taxpayers should not get a double tax benefit from a forgiven debt (i.e., a deduction with respect to expenses paid from the loan proceeds and an exemption from tax on the forgiven loan). However, we are not living in normal times.
In Notice 2020-32, issued yesterday, the IRS emphatically pronounced that taxpayers receiving Paycheck Protection Program (“PPP”) loans do not get to have their cake and eat it too!
As we discussed in a recent blog post, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the PPP under which the Small Business Administration is authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments. On April 24, 2020, Congress increased the amount of available funds under the PPP to $659 billion when the Paycheck Protection Program and Health Care Enhancement Act was signed into law.
The CARES Act expressly excludes from gross income any amount forgiven under the PPP. The question left unanswered by the CARES Act is whether the amounts forgiven that were spent by borrowers on otherwise allowable business expenses (i.e., payroll costs, rent, utilities, transportation and interest) are deductible under Code Section 162.
Notice 2020-32 quickly points out to taxpayers and tax advisers – not so fast – there are no free lunches. In essence, if the loan is forgiven and, as a result of the CARES Act, a taxpayer has no cancellation of debt income as he/she/it would otherwise have under Code Section 61(a)(11), the taxpayer certainly does not get to deduct the business expenses for which it used the forgiven loan proceeds.
A Succinct Summary of the Key Tax Provisions
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (colloquially, the “CARES Act” or the “Act”). The CARES Act is a historic $2.2 trillion relief package enacted by lawmakers in the wake of the COVID-19 pandemic. The Act is more than 880 pages in length and contains a multitude of provisions, all of which are intended to support individuals and businesses during these horrific times.
We have attempted to provide our readers with a broad overview of the most significant tax provisions of the Act. If a provision is potentially applicable to a given situation, please read the entire provision of the Act to affirm its application.
Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Portland Tax ForumTo be rescheduled
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Oregon Association of Tax ConsultantsBeaverton, OR, To be rescheduled
- To be rescheduled