PPP Update: Good Faith Certification & Tax Deductions

05/13/2020 1:59 PM | ACRAsphere Blog Team

The Paycheck Protection Program (PPP), created as a part of the CARES Act to help small businesses weather the pandemic, has been utilized by many ACRA firms. Since the PPP was created very quickly to meet demands, the Small Business Administration has been continually working to put out guidance to help businesses navigate the program and answer questions that arise.

The SBA put out new guidance and FAQs regarding the PPP today, and one particular aspect they have clarified concerns the good-faith certification that is required as a part of a borrower's loan request:

SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees.

Borrowers with loans greater than $2 million "may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance." All PPP loans in excess of $2 million will be subject to review by the SBA to for compliance with program requirements.

You can view the full FAQ document here.

Additionally, the a few weeks ago the IRS announced that companies who receive PPP loans will not be able to deduct expenses related to the forgivable loans (such as wages, which are normally deductible). Usually, forgiven debt counts as taxable income, but this is not the case with the PPP. The guidance put forth by the IRS was done in an effort to prevent a "double tax benefit."

However, lawmakers have since indicated to the IRS that this guidance was not within the intent of the program. From The Hill:

But Grassley, Wyden and Neal said that while the CARES Act was being written, lawmakers had expressed to Treasury that they did not intend to deny deductions for ordinary and necessary business expenses.

They said that if they had intended for the loan forgiveness to be tax-neutral, they wouldn’t have included the provision that makes the forgiveness tax-exempt and that the IRS guidance effectively renders that section meaningless. They also argued that the IRS interpretation of the tax code section in denying the deductions was flawed.

The Treasury Department has stated that they have taken the lawmakers' views into consideration and will be following up. However, Congress is also pursuing a legislative fix - Senator John Cornyn (R-TX) introduced legislation clarifying that businesses can deduct expenses paid by forgiven PPP loans, and Representative Lizzie Fletcher (D-TX) has indicated that she plans to introduce similar legislation in the House.

Read the full article from the Hill here. ACRA will continue to provide updates on the PPP and other relief packages/programs that are pertinent to CRM firms. Stay tuned to the ACRAsphere for the most up to date information.

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