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Ever-Changing PPP Guidelines Continue to Vex Borrowers

Posted on Dec. 4, 2020

Borrowers that received pandemic relief loans are at their wits’ end with the constant changes to the program, and Congress stepping in on the deductibility of expenses won't completely alleviate those concerns.

The flurry of guidance and constant changes to the Paycheck Protection Program have many borrowers uncertain of what tomorrow could bring, Jeff Albrecht of Sol Schwartz & Associates said December 3 during a webinar hosted by the University of Texas School of Law.

“It’s still a work in progress,” Albrecht said. “They came out with this PPP idea, and the IRS and the Small Business Administration have been kind of making up the rules as we go along. And so if you don’t like the way it’s looking today, it might be different tomorrow. Who knows?”

The PPP, created under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), generally allows businesses with fewer than 500 employees to borrow up to $10 million in some cases. If a specified portion of the loan is used for payroll costs, the loan is forgivable tax free. The program’s time frame was expanded in June.

The government’s rush to put out guidance on the new program after it was created only led to more questions. The guidance has come in the form of FAQs over the past few months, and the SBA and Treasury have also released several interim final rules on the program, along with forgiveness applications and instruction forms that provide options for borrowers depending on their loan amounts or employment numbers.

“This very much was flying an airplane while building it,” said Amy C. Moss of Chamberlain, Hrdlicka, White, Williams & Aughtry.

The program is set to expire at the end of the year, although lawmakers are debating whether and how to extend it. But perhaps the bigger debate in the legislative branch is whether to overturn IRS guidance that denies deductions for expenses funded with PPP loans.

Without legislation, there is “the specter of a surprise tax increase of up to 37 percent on small businesses when they file their taxes for 2020,” according to a letter to Congress signed December 3 by more than 560 organizations representing virtually every facet of the economy.

The IRS’s most recent guidance (Rev. Rul. 2020-27, 2020-50 IRB 1) said borrowers can’t deduct expenses with forgiven PPP loans if they reasonably expect the loan to be forgiven, regardless of when the forgiveness is granted.

Moss said borrowers are wondering how long it will take for the loans to be forgiven, and that it will be “quite a journey” for many. Borrowers don’t have to apply for forgiveness until 10 months after the covered period expires, Moss added. Lenders have 60 days to approve the loan forgiveness application, and then there are another three months during which the SBA has the right to review the application. The SBA has also said it will audit PPP loans of over $2 million.

Since the inception of the PPP, tales of fraud and abuse have continued to materialize. Some borrowers are also wondering how government enforcement will work in cracking down on abuses. Moss responded that the SBA, IRS, and SEC are all going after borrowers that abused the program.

“The banks are scared to death,” Albrecht said. “They don’t want to get stuck with all these loans.”

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