IRS and Treasury Release Guidance on Deductibility of PPP Expenses

Date November 23, 2020
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On November 18, the Department of Treasury and IRS released long-anticipated guidance regarding the tax treatment of expenses used to support Paycheck Protection Program (PPP) loan forgiveness. IRS Notice 2020-32, released earlier this year, stated that expenses are not deductible if the payment of that expense results in forgiveness. While some Congressional leaders have proposed that the IRS notice was not consistent with legislators’ intent, no Congressional action has been taken to date that would overturn the IRS notice. Further, little additional guidance was released for borrowers and taxpayers. This week’s guidance now offers some clarity. The revenue ruling (2020-27) and revenue procedure (2020-51) explain that businesses “may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.” The guidance means that PPP loan borrowers expecting forgiveness cannot deduct the expenses generating forgiveness in the taxable year the expenses occurred. The deductibility of these expenses is not dependent on the borrower submitting a forgiveness application nor on the borrower receiving forgiveness. It is only dependent on whether the borrower “reasonably expects to receive forgiveness.” If a borrower reasonably expects forgiveness and does not deduct the expenses, and it is later determined that their loan is not forgiven, the expenses may be deducted on their original or amended 2020 tax return or their original 2021 return. PPP loan guidance continues to evolve. For questions about your PPP loan, forgiveness, or the newest IRS and Treasury guidance, please reach out to your HBK Advisor.
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Five Common Concerns About PPP Loan Forgiveness Applications

Date November 11, 2020
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Borrowers of Paycheck Protection Program (PPP) loans have begun working through their forgiveness applications and are learning that the process is quite complex. While applying for forgiveness is different for each borrower, here are five issues that have surfaced as common concerns and that may affect the amount of forgiveness you receive:

1. Different inputs can equal different outputs.

Application instructions include a variety of options, including several eligible costs, different reference periods, several safe harbor options, and different methods of calculations. Your amount of forgiveness will vary depending on the options you use.

  • If you complete the application and are not pleased with your projected level of forgiveness, make sure you have considered all your options. For example, did you consider the different reference periods used to determine the FTE Reduction Quotient? Have you compared both the standard and the simplified methods in calculating the FTE count? Have you considered all safe harbor options for the FTE reduction and average annual salary/hourly wage reduction?

2. Coordination with the EIDL advance.

If you received an Economic Injury Disaster Loan (EIDL) Emergency Advance or Emergency Grant (EIDLG), your PPP loan forgiveness will be reduced by the amount of your advance or grant. You must include the advance or grant amount as well as the EIDL application number on your PPP loan forgiveness application.

  • Be sure that you include only the EIDL advance or grant amount on the EIDL advance amount line, not the entire EIDL amount. Note that EIDL Advance amounts will not exceed $10,000.
  • Do not reduce your projected forgiveness amounts listed on the forgiveness application by your advance or grant amounts. The SBA will reduce the forgiveness amount provided to your lender.

3. Eligible payroll costs.

Payroll costs eligible for forgiveness include employer contributions for employee health insurance.

  • Include only the employer portion of the contribution as an eligible payroll cost. Employee contributions are already included in the employee’s gross payroll or cash compensation. As such, employers cannot rely on the totals indicated on your health insurance bills. Additional limitations apply if you are an owner of 2 percent or more of an S corporation as well as to those owners’ family members. For those individuals, employer contributions for health insurance are considered cash compensation.

4. Ratio of forgivable payroll and non-payroll costs.

The Paycheck Protection Program Flexibility Act of 2020 (PPPFA), passed by Congress on June 5, provides that no more than 40 percent of forgiveness can be attributed to non-payroll costs. You are required to certify this on the S application and show it as a calculation on line 10 of the Standard application or line 7 of the EZ application.

  • Calculation: On line 10 of the Standard application and line 7 of the EZ application, follow the instruction to divide line 1 (eligible payroll costs) by .6. The calculation determines a potential amount of forgiveness if the payroll costs are reported equal to 60 percent of that forgiveness. This potential forgiveness amount will be compared with the PPP loan amount and the calculation including your FTE and annual salary/hourly wage reductions, where the lowest of the three will be used as the application’s forgiveness amount.

5. Ensure your data is easy to understand by the lender and the SBA.

Business owners understand their businesses better than anyone else. Even payroll reports can have quirks or customizations that they, their managers and employees find it easy to understand but that might not be clear to those reviewing your reports for loan forgiveness.

  • Make the data as transparent as possible. While the SBA provides specific documentation requirements, maintaining and in some cases submitting clarifications, reconciliations and other data may make it easier for the lender and SBA to review their documentation—especially where prorations or limitations apply. Appeals processes are available but not guaranteed, so it is important to ensure your data and justification are clear in your initial submission.

Contact your HBK advisor with your PPP loan forgiveness application questions or concerns.

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Borrowers Should Prepare to Answer New PPP Loan Necessity Questionnaires

Date November 3, 2020
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Borrowers, together with their affiliates, who have loans over $2 million may be required to provide additional information to support the certifications made on their Paycheck Protection Program (PPP) loan application via two new SBA questionnaires.

When applying for the PPP loan, borrowers certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The certification drew attention in May when some borrowers were alleged to have taken loans without it being “necessary,” and some large companies returned borrowed funds. The SBA also released an FAQ indicating that “to further ensure PPP loans are limited to eligible borrowers in need, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans over $2 million, in addition to other loans as appropriate.” While subsequent guidance indicated the SBA could review the borrower’s eligibility, including for this certification, no guidance has been provided to indicate how the SBA would evaluate how borrowers determined they had the need required to make this certification.

Now, SBA Form 3509 and SBA Form 3510 have begun circulating (although they have not been released directly by the SBA or Treasury). Instructions on the forms indicate that borrowers and their affiliates (per SBA affiliation rules) that received loans over $2 million would be required to complete and submit both forms, which address the borrowers’ business activities and liquidity. Accordingly, lenders would request the forms from borrowers, and borrowers would be required to complete them within 10 days of lenders’ requests.

These forms, or questionnaires, have not been confirmed as official by the SBA or Department of the Treasury, and no corresponding guidance has been issued. However, borrowers with loans greater than $2 million should review the forms with the understanding that they are likely to be used by the SBA to confirm eligibility. Borrowers concerned about their eligibility should contact their legal counsel.

If you have questions about your PPP loan, forgiveness, or the Loan Necessity questionnaires, please contact your HBK Advisor.

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PPP Loan Borrowers Should Consider Potential Tax Obligations Related to Loan Forgiveness

Date October 30, 2020
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Paycheck Protection Program (PPP) loan borrowers need to think beyond applying for loan forgiveness to the tax ramifications associated with forgiveness, especially as the calendar year-end nears and tax issues are top of mind. According to the CARES Act, PPP loan funds are not taxable. However, in May the IRS issued notice 2020-32 making the expenses used to generate forgiveness taxable. Congress has expressed disappointment with the IRS position but has not yet passed legislation to overturn it. Many believe it will be addressed in the next round of stimulus legislation. However, several pieces of proposed PPP legislation do not address the IRS position, leaving the question of whether Congress fully intends to act on the IRS position. Several tax credits and deductions available to businesses, including the research and development (R&D) tax credit, work opportunity tax credit (WOTC), and qualified business income (QBI) deduction rely at least partially on employee wage calculations. Due to the IRS ruling, borrowers using wages to support PPP loan forgiveness could lose those tax credits and deductions. As such, they should carefully consider how they support forgiveness, including using costs other than gross payroll on their forgiveness applications. Unless Congress legislates otherwise, borrowers should prepare to pay taxes on PPP loan forgiveness expenses, including in their estimated payments and year-end tax planning. As program regulations disallow the use of PPP funds and many COVID-19 relief grants and loans to pay taxes, borrowers should consult their CPAs before dedicating any relief program funds to tax obligations. Borrowers also need to be vigilant about how their states will treat tax obligations relating to PPP loans. Many states have yet to declare a position on how PPP loans or the associated forgiveness expenses could be taxed. Borrowers should watch for guidance and be prepared to meet any tax obligations. To discuss your tax obligations with respect to your PPP loan and associated forgiveness, contact your HBK Advisor.
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SBA Seeks to Simplify PPP Loan Forgiveness for Small Borrowers

Date October 9, 2020
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On October 8, 2020, the Small Business Administration (SBA), in conjunction with the Treasury Department, released a new application designed to simplify the Paycheck Protection Program (PPP) loan forgiveness process for some small borrowers.

SBA Form 3508S is intended for borrowers who received PPP loans of up to $50,000. However, if those borrowers and their affiliates received loans totaling at least $2 million, they are not eligible to use Form 3508S.

Form 3508S simplifies the forgiveness process by eliminating the FTE and wage/salary reduction calculations. In an Interim Final Rule also released on October 8, the SBA and Treasury explained that these exemptions are allowable as de minimis exceptions to the CARES Act. Specifically, the SBA believes that most borrowers in this dollar range would not be affected by these reductions because they did not have FTE or wage/salary reductions or they would otherwise qualify for the safe harbor options.

Borrowers who do not fall into the under-$50,000 range should continue to use Form 3508 or Form 3508EZ applications. They should also stay alert to possible changes to forgiveness requirements through future legislation.

To obtain the SBA copy of the simplified application, instructions and related Interim Final Rule, visit:


For questions about PPP loan forgiveness or for support in completing the application documents, please contact your HBK Advisor.

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Update: Main Street Lending Program Opens for Borrower Applications

Date July 8, 2020
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According to a July 6 announcement, the Federal Reserve Board’s Main Street Lending Program (MSLP) is now fully operational. Lenders are accepting applications and the Federal Reserve is prepared to participate in eligible loans, the agency said.

The program is designed to help small and medium-sized business relieve the financial strain caused by the COVID-19 crisis. Loans can range in size from $250,000 to $300 million. The loans are not grants and will not be forgiven.

Interested parties can review the program, eligibility, term sheets for each facility (new, priority, or expanded), and frequently asked questions via the following links:


Prospective borrowers can also contact a lender participating in the program for additional details. Not all lenders are participating.

If you have questions about the MSLP or other COVID-19 relief options, please contact your HBK Advisor.

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