Paycheck Protection Plan (“PPP”) Loans [for entities such as Sole Proprietors, S-Corps, C-Corps, Partnerships, LLCs, and “Schedule C” activities]
Update May 4, 2020 **Please read for important updates**
See below for original PPP loan specifics.
IRS Written Evidence Requirement
It appears certain that the IRS will require some form of written evidence to support a loan recipient’s claim that Covid-19 adversely impacted the business. However, the IRS remains undecided on specifically what that evidence will be or what is deemed a justifiable impact. As such, the following are examples of what we suggest should be prepared by our clients who have accepted PPP Loan financing:
- P&L’s comparing year to date and monthly results 2020 vs 2019:
- Evidence of a decrease in net income year to date vs the prior year to date, or
- Evidence of a decrease in net income current month vs earlier months in 2020, or
- Evidence of a decrease in net income for any appropriate period in 2020 vs the same period in 2019.
- Cash projections to the extent available, showing the expected reduction in cash this year vs the prior year
- Aged accounts receivable reports comparing year to date 2020 vs the prior year. This report should show less cash coming into the business as accounts receivable grows, and longer wait times before the balances are paid
- Copies of cancelled sales or work projects the business has suffered this calendar year, as a result of its customers being adversely affected by the pandemic
- Layoff documents detailing when the business cut its workforce, and how many employees were affected
- Cancelled sub-contractor agreements where the work has either been delayed or cancelled
Impact of Failing to Document an “Adverse Impact” to the Business
According to the SBA/IRS:
- Potential criminal liability under the Fraud Statute
- Fines of up to $1,000,000
- Prison terms of up to 30 years
While the above punishments are probably extreme cases, they do emphasize the serious nature of accepting government funded loans under false pretenses. It should be noted that a loan recipient may forgo the above documentation needs as well as future audit issues by simply returning the funds in total by this Thursday May 7. We further recognize that every business has a unique set of facts and circumstances which when taken collectively can illustrate an adverse impact on its operations. Therefore, the above items are only meant to be a guide and are in no way intended to be all-inclusive.
Businesses Under Mandatory Lockdown
If your business was closed by governmental or municipal order (restaurants, bars, hair salons, schools which in turn shut down vendors or contractors providing services, etc.) then by definition your business was adversely impacted by the pandemic. You should still prepare the documents stated in the Written Evidence section above, but the evidence will clearly show a discontinued operation and an adverse impact.
IRS Treatment of Expenses Incurred on Forgiven PPP Loans
The IRS has recently taken the position that business expenses paid from PPP loan proceeds that are later partially or fully forgiven cannot be deducted as business expenses. The forgiven loan is not treated as income, so in essence the entirety of the Loan transaction would not impact the books.
AS OF APRIL 11, 2020
PPP Loan, in Summary
A forgivable loan granted by your local bank intended to cover employee, contractor or self-employment payroll and benefits expenses during an eight-week period commencing after the loan is granted. Applications will be accepted between April 3 and June 30, 2020 with the grant date of the loan within a few business days thereafter. The total loan amount will be 2.5 times the average monthly salaries and benefits a business paid to its full-time equivalent employees over the last year, or for a sole proprietor it will be 2.5 times the average monthly net income.
Criteria for Obtaining a Loan
- The business was in operation on Feb 15, 2020
- Employee compensation as evidenced by a Form 940
- If a sole proprietor, 2019 business P&L showing a net income
- Certify that the business suffered as a result of the pandemic
- Certify that the loan proceeds will only be used for business related purposes
Criteria for Loan Forgiveness
The Loan is partially or fully forgivable if the funds are used as follows over an eight-week period beginning on the date the loan is granted:
- A minimum of 75% for salaries and employee benefits
- Rent or mortgage payments
The loan must be repaid within two years if funds are used for any other purpose
SKP Tips and Suggestions
- Open a separate bank account for the PPP Loan. Keep the Loan proceeds separate from the other business account(s)
- Disburse “loan forgiveness” items as listed in the section above directly from this account, or transfer from this account the exact dollar amount needed to make such disbursements
- Reinstate any laid-off employees released as a result of the pandemic as soon as possible after the PPP Loan is granted. This is the best way to achieve the 75% payroll hurdle for loan forgiveness
- Keep handy all documents used in computing the PPP Loan amount
- Do not request a PPP Loan unless you can certify – and later demonstrate – that your business was justifiably impacted by the pandemic. It is expected that the administrators overseeing these loan programs will later require evidence to support the assertion that a business was impacted. We anticipate penalties to be assessed if such documentation cannot be provided.
Please note: The SKP team is here throughout the loan application period to assist in any way you need. Contact us when we can be helpful to you.