The federal Coronavirus Aid, Relief and Economic Security (CARES) Act includes several provisions to help companies hit by mandatory pandemic shutdowns, but restrictions when taking out a Paycheck Protection Program (PPP) loan have created unpleasant surprises for some companies.
Business owners initially focused on the loans piece of the CARES Act because the PPP loans were touted by most sources as quick, easy and free money, said Joseph McCaffrey, partner at Morris + D’Angelo CPAs in San Jose, Calif. “There was intense focus on PPP loans without considering other tax benefits and whether the loans might eventually need to be paid back or what the process of loan forgiveness would be.”
Generally, there can be a tricky interplay between PPP loans and other cash-flow benefits such as the employee retention credit (ERC), said Michael Greenwald, partner at Friedman LLP in New York City. “The IRS has done a fairly good job so far of explaining these trade-offs but there is still a need for additional clarity,” he said.
“Since the rollout of the CARES Act in early April, the Treasury Department and the Small Business Administration have issued nine interim final rules and at least 40 pieces of guidance,” said Alan Wink, managing director at EisnerAmper LLP in Iselin, N.J. “Additional guidance is now issued almost daily.”
Clarified issues now include expenses eligible in the covered forgiveness period and how to calculate full-time employees. “Much of the interplay between the PPP and the other relief provisions, such as the ERC and Economic Injury Disaster Loan [EIDL] program loans, has been addressed over the past month,” added Robbin Caruso, CPA, CGMA and partner at Prager Metis in Cranbury, N.J.
For instance, it’s now clear that business owners may obtain a PPP and EIDL program loan as long as the proceeds aren’t utilized for the same purpose. A business may also access the ERC for the period prior to receiving the paycheck protection funding. A business that repaid the PPP loan through the limited safe harbor will be eligible for the ERC if they otherwise qualify.
“Of major concern still is the lack of flexibility in the timeframe for businesses using these funds, especially for businesses currently shut down,” Caruso said, “and the added requirement to use 75 percent of the funds eligible for forgiveness towards payroll costs.”
Deployment of no more than a quarter of the loan for non-payroll costs could cause problems for some companies, as could the two-year loan term for companies not receiving full forgiveness, the borrower certification and borrowers’ accurate assessment of need.
Forgiveness of PPP loans is “a tax-free event,” Wink said, but “the proceeds of the loan used to pay payroll, benefits, rent, utilities, mortgage interest will not be included as operating expenses when a company calculates taxable income.”
In many cases, business owners are learning that the process for obtaining forgiveness is time-consuming and subject to numerous rules, many of which are unclear.