The US Department of the Treasury and the Small Business Administration (SBA) released some updated details to the Paycheck Protection Program (PPP). These updates effect (a) Safe Harbor Repayment Deadline, (b) Economic Necessity Requirement for PPP Loans, and (c) Tax Implications of PPP Loans.
Safe Harbor Repayment Deadline
Entities who received PPP loans and have subsequently determined they are not eligible for the program may return the funds penalty-free until May 18, 2020.
It is very important to remember that while a lending institution may approve a PPP loan application for an ineligible entity,
the borrower bears the ultimate responsibility to demonstrate financial need, eligibility and use of the proceeds.
Economic Necessity for PPP Loan:
- All borrowers under the PPP program must make a good faith certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
- Any entity (or group of affiliated entities) who receive less than $2 Million in PPP loans automatically considered to have made this certification. They are terming this their safe harbor threshold.
- Any entity (or group of affiliated entities) who receive more than $2 Million in PPP loans should retain documentation of their good faith determination of economic need
- PPP Loans in excess of $2 Million are subject to SBA Audit
- If the SBA determines the entity lacked the economic necessity for the loan, they will have the opportunity to repay the loan in full upon SBA demand. If they do so, they will not be subject to any additional enforcement actions or referrals to other agencies.
Tax Implications of PPP Loans
- PPP Loan forgiveness amounts are considered tax exempt income under Section 1106 of the Cares Act.
- The IRS is applying Internal Revenue Code section 265(a)(1) to any expenses paid with forgiven funds. Under this section, the expenses paid with forgiven funds are not deductible for tax purposes. This treatment is intended to prevent a double tax benefit.
Please contact our office with any questions or concerns.