Many of you have contacted us about specifics surrounding the PPP loan regulations… unfortunately the IRS has yet to issue them! We promise, as soon as we receive them, you will be the first to know.
However, the IRS did issue IRS Notice 2020-32, which eliminates the deductions for any items paid from PPP loan proceeds that are forgiven. This means that payment of rent, mortgage or payroll will not be deductible on your 2020 taxes, under current IRS rules. This IRS notice is in direct conflict with what Congress wanted to achieve with the Paycheck Protection Program. Congress’ intent was to allow small business owners to retain employees and recover from the COVID-19 health crisis, via a loan that turned into a grant.
We anticipate additional clarification on this notice, including the roll back of the deduction allowance. If this isn’t addressed by the time returns are due, HTH will file protective claims on behalf of our clients to keep the statute of limitations open until we have legislation. Stay tuned.
Last week, we discussed SBA PPP FAQ #31, which deals with the requirements for large companies to adhere to strict forgiveness rules surrounding time restrictions and the need for the loan. This week, with SBA PPP FAQ #37, the IRS confirmed that the rules outlined in #31 pertain to all borrowers, regardless of the size of your loan or firm. Namely, if recipients can’t show a true “need” for the loan, they will not receive forgiveness.
Late last month, U.S. Secretary of the Treasury Mnuchin stated that those receiving loans of $2M or more automatically will be audited before any loan forgiveness is granted and that there would be a focus of access to other forms of liquidity. The key to forgiveness is providing a detailed outline and documentation of why you need(ed) the loan, your lack of access to other financing, and a detailed accounting of how the money was spent with back up.
IT IS IMPERATIVE TO DOCUMENT YOUR NEED FOR THE LOAN TODAY
We recommend that you place the following in a file for potential audit:
- exact financial calculations used to apply for the loan, including payroll, rent, mortgage or other expenses,
- statement with documentation of specifics on why the loan was needed based on your unique business, including client or order loss and other aspects that lead to your need for the loan application, accounts receivable, cash flow projections, etc. Be sure to document now as you will not be able to recall all of the details at the time you may be audited
- exact compensation details for any employee on payroll, including medical and/or retirement plan payments,
- precise record of payments made with corresponding invoices or documents i.e. loan bill, utility invoice, or retirement plan statement.
Notice that we have used the words, exact, specific, precise, and details when describing documentation. The more information you include now, the easier it will be to prove the loan for forgiveness.
We strongly recommend that you adhere only to these items in the payments against your loan; this is not a time to play games.
I think we need to talk about the May 14th deadline to give the money back if you feel that the funds are not needed. We are available to discuss or help with any questions.
If you have further questions on documentation, please contact our team. We will post questions on our social media feeds and in our upcoming briefs.
Question of the Day
How do I true up my employees?
Good question! The IRS and SBA haven’t released calculations yet. We hope to get this next week.