Some answers on the tax-free forgiveness portion of the new small business loans were recently released, and while the results were mostly favorable to businesses, there are still issues that practitioners say haven’t been addressed.
“They have introduced more questions than they have answered here,” Amal U. Dave of Arent Fox LLP told Tax Notes. “And the piecemeal distribution of rules makes it really hard for businesses to plan. What’s more, some of the calculations required will necessitate professional assistance, which only increases the burden on already struggling businesses.”
The Small Business Administration’s application and instructions for forgiveness of Paycheck Protection Program (PPP) loans, released late May 15, clear up one big ambiguity in the language in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) concerning how the money is spent by employers.
Employers that received loans under the PPP can have them forgiven on a tax-free basis as long as a specified portion is used for payroll costs during the covered period, which is eight weeks from the receipt of the loan. But the statute says forgiveness is for “costs incurred and payments made” for forgivable costs during the eight-week period, and the word “and” in the statutory language gave some businesses pause.
Practitioners pointed out that a business could receive a loan and a few days later, after the eight-week clock has started, paychecks could go out to employees that would technically be for costs incurred before the covered period, even though they were paid during the covered period.
Lane Powell PC lawyers said in a client alert May 18 that the application and instructions took the favorable position on the issue and interpreted the “and” in the statutory language as disjunctive regarding payroll costs.
“This could materially increase payroll costs depending on when a business received its PPP loan,” the Lane Powell alert said. “For example, if a business received a PPP loan on April 29, and pays payroll on the 15th and last day of each month, with paychecks cut on April 30, then the business effectively gets an extra 13 days of payroll forgiven.”
The application and instructions also provide guidance that is meant to reduce compliance burdens and make the process easier for borrowers, according to a Treasury statement.
Treasury said the guidance includes an alternative payroll covered period that gives borrowers the option to calculate payroll costs in alignment with regular payroll cycles. The guidance also includes a favorable interpretation of statutory exemptions from loan forgiveness reductions based on rehiring by June 30, and a new exemption from loan forgiveness reduction for borrowers who made good-faith offers to rehire workers that were declined.
But according to the American Institute of CPAs, the guidance still leaves open too many issues for the process to function as intended.
“It’s clear the application form and instructions provided yesterday are not enough,” said Erik Asgeirsson, head of CPA.com. “Some of the most pressing issues are not addressed, and in other areas it appears new questions have arisen.”
Frustration over the lack of guidance has been a theme throughout the PPP loan process. Immediately after the CARES Act was signed into law March 27, borrowers rushed to get loans to fund operations. But practical questions immediately popped up, and the SBA and Treasury were tasked with getting out guidance as fast as possible to get the program off the ground.
That has led to several rounds of guidance in the form of interim final rules and FAQs. A few weeks into the program, it was revealed that several large public companies received loans that were really intended for smaller businesses that desperately needed the money.
As a result, certification standards for the loans were tightened, but that only raised more questions and led to some smaller businesses giving back their loans before later guidance indicated that they didn’t need to.
Even as more guidance was sporadically released, practitioners knew the real hook would be how the forgiveness portion of the loans would be implemented. The application and instructions are a helpful start, but practitioners say that they want more because so many questions remain unanswered.
One major issue with the PPP is the different language used concerning employees. For purposes of loan eligibility, the CARES Act defines employee to include “individuals employed on a full-time, part-time, or other basis.” But for loan forgiveness, the amount forgiven is reduced by the reduction in full-time equivalent employees, a condition that was left open to interpretation.
Melissa Ostrower of Jackson Lewis PC said the forgiveness instructions helped explain how full-time equivalency is determined — based on the average hours paid, divided by 40. But she said one open question is whether an employee who is receiving severance pay can count in that calculation.
The instructions help explain what expenses count as covered utility payments, such as electricity, gas, water, transportation, telephone, and internet, Ostrower said.
“However, the instructions do not explain how retirement plan expenses are determined where the employer makes nonelective contributions calculated at year-end or where an employee participates in a defined benefit pension plan,” Ostrower added.