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  1. Small business COVID-19 resource center
  2. Paycheck Protection Program: Legal & Tax FAQs

FAQ

Paycheck Protection Program

Experts from Practical Law and Checkpoint address the common questions we’re hearing as small businesses and their advisors navigate the new Paycheck Protection Program.


PPP Application and Loan terms

  • The deadline to file a PPP loan application was August 8, 2020. (Source: P.L. 116-147, July 5, 2020).

  • Your bank must make the first disbursement of the loan within ten calendar days from the date of loan approval. (Source: SBA FAQs dated as of June 25, 2020, Footnote 5).

  • PPP loans that receive an SBA loan number on or after June 5, 2020 have a term of five years. If a PPP loan received an SBA loan number before June 5, 2020, the loan has a two-year maturity, unless the borrower and lender mutually agree to extend the term of the loan to five years. (Source: SBA FAQs dated as of June 25, 2020, Question 49).

  • The length of payment deferral depends on whether the borrower applies for loan forgiveness. If the borrower applies for loan forgiveness, payments of interest, principal, and fees on PPP loans are deferred until the amount approved for forgiveness, if any, is remitted by the SBA to the lender. If the borrower has not applied for forgiveness by the date that is 10 months after the end of the covered loan, payment deferral will end on that date.  For example, if a business received a PPP loan disbursed on June 25, 2020, the 24-week covered period would end on December 10, 2020. If the business does not submit a loan forgiveness application to its lender by October 10, 2021, it must begin making payments as of October 10, 2021. (Source:  SBA FAQs on PPP Loan Forgiveness dated as of August 4, 2020).

  • The covered period is the timeframe used to calculate PPP loan forgiveness. PPP funds spent on costs incurred after the covered period ends are not eligible for forgiveness. The covered period for a PPP loan is generally either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) covered period beginning on the PPP loan disbursement date. Covered periods cannot extend beyond December 31, 2020. Thus, borrowers that received PPP disbursements after July 15 will not be able to use the full 24-week covered period. (Source:  SBA FAQs on PPP Loan Forgiveness dated as of August 4, 2020).

Loan forgiveness application process

  • Borrowers are not required to request loan forgiveness. (Source: Treasury Information Sheet for Borrowers, March 31, 2020).

  • To receive PPP loan forgiveness, the borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508, 3508EZ, or the lender's equivalent form) to the lender that originated or is servicing the loan. The borrower is responsible for providing the lender an accurate calculation of the loan forgiveness amount. The lender then reviews the forgiveness application, issues a decision to the SBA, and notifies the borrower of the forgiveness amount, if any, paid by SBA to the lender. (Source: SBA Procedural Notice, effective July 23, 2020).

  • The SBA will begin accepting loan forgiveness decisions from lenders on August 10. Generally, borrowers will submit a Loan Forgiveness Application following the end of the covered period. A borrower may apply for loan forgiveness before the end of the loan’s covered period, provided that (i) the borrower has used all of the loan proceeds for which it’s requesting forgiveness and (ii) the forgiveness application accounts for any salary reductions in excess of 25% for the full (8-week or 24-week) covered period. If a borrower does not apply for forgiveness within 10 months of the end of the covered period, it must begin making payments on the loan at that time. (Source: SBA Procedural Notice, effective July 23, 2020).

  • The lender must finish its review of the Loan Forgiveness Application and submit its decision on the application to the SBA within 60 days of receiving the application from the borrower. The lender must submit to the SBA (i) its decision on whether the loan should be forgiven, (ii) the amount of the loan to be forgiven, and (iii) other required documents. (Source: SBA Procedural Notice, effective July 23, 2020).

  • A borrower that submits its loan forgiveness application within 10 months of the end of the loan’s covered period is not required to make any payments until the forgiveness amount, if any, is remitted to the lender by SBA. If the loan is fully forgiven, the borrower is not responsible for any payments. If the loan is only partially forgiven, unless that decision is successfully challenged, the borrower must repay the unforgiven amount according to the terms of the loan. The lender is responsible for notifying the borrower of remittance by SBA of the loan forgiveness amount (or that SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable. (Source:  SBA FAQs on PPP Loan Forgiveness dated as of August 4, 2020.)

  • If the lender does not forgive the loan, or only partly forgives it, the borrower must pay the balance due before the loan matures. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount to the lender, if any. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven. (Source: SBA Procedural Notice, effective July 23, 2020).

  • Yes. After the lender notifies you that the loan is either not forgiven or only partly forgiven, you may notify the lender that you’re requesting the SBA review the lender's decision. You must file that request with within 30 days of receiving the lender's notice. If the SBA accepts the review request, the SBA will notify the borrower and the lender of the results of its review. There does not appear to be a time frame for the SBA to complete its review. (Source: SBA Procedural Notice, effective July 23, 2020).

Loan forgiveness calculations

  • The covered period for the loan forgiveness calculation begins on the date the lender makes the first disbursement of the PPP loan to the business but if you have a biweekly (or more frequent) payroll cycle, you may choose to have the period start on the first day of the first payroll period after the loan disbursement date. (PPP Loan Forgiveness Application Instructions, June 16, 2020.)

  • Yes. At least 60% of the total loan proceeds must be used for eligible payroll costs in order to be eligible for full loan forgiveness. In addition, at least 60% of the loan forgiveness amount (which may be lower than the total loan proceeds) must be used for eligible payroll costs. The threshold was originally set at 75% in the CARES Act and was reduced to 60% by the Paycheck Protection Program Flexibility Act.

  • Although the business used less than 60% of the total loan proceeds for payroll costs, partial loan forgiveness is available. Based on current interpretations of the loan forgiveness program, the estimated loan forgiveness amount would be $85,000, not zero, calculated as follows. Because $15,000 was used for non-eligible costs, the potential loan forgiveness amount would be capped at $85,000. The $55,000 used for payroll costs is 64.7% of $85,000. Therefore, since more than 60% of the forgivable amount of the PPP loan was used for payroll, the estimated loan forgiveness amount would be $85,000. (Source: SBA FAQs on PPP Loan Forgiveness dated as of August 4, 2020).

  • Unless an exception or safe harbor applies, the loan forgiveness amount is subject to reduction as a result of decreases in FTE employees, salaries, or wages.  (PPP Loan Forgiveness Application Instructions, June 16, 2020).

  • In calculating loan forgiveness, the borrower can exclude a reduction in FTE employees for (1) any positions for which the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020, and the borrower was unable to hire similarly qualified employees for unfilled positions by December 31, 2020; and (2) any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the covered period and the employee rejected the offer, and (3) any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours and for which the position was not filled by a new employee. (PPP Loan Forgiveness Application Instructions, June 16, 2020).

  • The borrower is exempt from the FTE-based reduction in loan forgiveness if it can, in good faith, document that it was unable to operate between February 15, 2020, and the end of the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. (PPP Loan Forgiveness Application Instructions, June 16, 2020).

  • A borrower is exempt from the FTE-based reduction in loan forgiveness if it reduced its FTE employee levels during the period beginning February 15, 2020, and ending April 26, 2020, provided the borrower restored its FTE employee levels by December 31, 2020 to the levels in the pay period that included February 15, 2020. (PPP Loan Forgiveness Application Instructions, June 16, 2020).

Taxes

  • No. In general, loan proceeds are not considered taxable income to the borrower.

  • Ordinarily, forgiveness or cancellation of a loan can result in federal taxable income for the borrower, unless one of several exceptions applies. The CARES Act creates a new exception for PPP loans. After applying the other available exclusions, a business can exclude any remaining amount of PPP forgiveness from their federal gross income. Note that the CARES Act applies only to federal income taxes. While many states will mirror the federal rule, PPP loan forgiveness may be subject to income tax in some states. (Source: IRS Notice 2020-32).

  • No, to the extent the loan is forgiven. According to IRS guidance, expenses paid with PPP loan proceeds are not deductible if payment of the expense results in forgiveness of any portion of the loan. There has been pushback on this interpretation from the AICPA and numerous lawmakers. Businesses should consult with a tax professional on how to treat these expenses for the 2020 tax year, particularly if the business does not expect to receive a loan forgiveness determination prior to filing its 2020 return. (Source: IRS Notice 2020-32).

  • If your business receives a PPP loan, it can impact eligibility for other relief. For example, a business that receives a PPP loan is not eligible for the Employee Retention Credit, even if the business does not request forgiveness and ultimately repays the loan. (An exception applies to businesses that repaid their loans by May 18, 2020.) If your business is planning to claim new credits for COVID-19 paid sick or family leave, be aware that you cannot claim these credits for wages paid using PPP funds. The CARES Act also allows employers to defer deposits and payments of the 6.2% employer share of social security tax for 1-2 years. Under the PPP Flexibility Act, a business is still eligible for this payroll tax deferral even after it is granted PPP loan forgiveness. (IRS COVID-19-Related Employee Retention Credits: Interaction with Other Credit and Relief Provisions FAQs dated as of May 27, 2020).

Last Updated: 8/12/2020

Additional resources

This page was created by Thomson Reuters legal and tax experts to assist your small business. For further in-depth coverage, access free COVID materials via the following Thomson Reuters platforms.

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