Is a PPP loan the right move for your business?
With the latest updates from the Small Business Administration (SBA), some businesses are rethinking their acceptance of Paycheck Protection Program (PPP) loans for three reasons. First, there is a likelihood that the names of companies accepting the loan will become public. Second, and more importantly, recent guidance provided by the SBA indicates that being uncertain about how COVID-19 will impact one's business may not be a sufficient enough reason to apply for the loan. And third, a recent IRS notice stated that expenses paid by the loan will not be deductible for income tax purposes.
SBA's new guidance on PPP Loans
The SBA published a new FAQ page, updated on April 29, 2020, which offers guidance to help companies determine their eligibility based on economic need for a PPP loan. The FAQ helps address questions for larger companies to determine whether the loan is deemed "necessary" for their business. One of the certifications on the application requires the applicant to assert that "Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." This certification is explained in more detail in the FAQ.
Borrowers can avoid eligibility questions if the PPP loan is paid back in full by May 7, 2020. If a company borrowed before April 23 and paid back before May 7, the certification will be considered to have been made in good faith. No fines or penalties will be incurred.
The concern some have is that penalties could be imposed if a business is determined to have taken the loan when it should not have, including fines and/or serious legal consequences, up to imprisonment. This lack of definitive standards and the uncertainty as to the consequences has prompted some businesses to decide to pay back the PPP loan by May 7th, 2020.
IRS Notice and Tax Considerations
IRS Notice 2020-32, which came out on April 30, provided confirmation that expenses like wages, rent, and other expenses that are normally fully deductible, will not be deductible for income tax purposes if they are paid by the loan. This is another important factor to consider when deciding whether the PPP loan makes sense for your business.
If you have questions on PPP loans, the latest updates from the SBA, or the recent IRS Notice, please reach out to a member of your Chortek team.
