Protecting Clients (and your firm) from Civil and Criminal Penalties in a “Necessary” Challenge Under the PPP Loan Program – What to do NOW!
JUST RELEASED: SBA is extending the repayment date for this safe harbor to May 14, 2020. Borrowers do not need to apply for this extension. This extension will be promptly implemented through a revision to the SBA’s interim final rule providing the safe harbor. SBA intends to provide additional guidance on how it will review the certification prior to May 14, 2020.
Practitioners and clients who have taken PPP loans must decide whether to refund them by May 14th. LISI Commentators Bob Keebler, Marty Shenkman and Alan Gassman join forces to provide answers to the most critical PPP questions that many advisors have struggled with, namely, what should you do and what should you advise clients to do?
This content-filled webinar will cover the following points:
- Calculations you may want to make as soon as possible·
- How to document your file to show that a loan was "necessary" and that clients have had every intention of complying with the law.
- How to keep records of payments made and how to support them
- What may be done to plan for deductibility, and budgeting for expenditures that may not be tax deductible, preparing to file protective claims with the IRS.
Discussion of the above items will include consideration and deliberation with respect to the followng:
- Overview of the requirements for a PPP loan as we understand them today, as a somewhat moving target.
- Bob Keebler’s timeline of events to set the stage.
- The worrisome penalties that may apply.
- Documenting your industry’s issues and regional factors.
- Documenting the status of your business and significant uninsured and economic riks as of the loan application date and when the loan proceeds are received.
- Should you refund your PPP loan by the May 14, 2020 "amnesty date" to avoid potential penalties?
- Bad press from PPP loan applications, and steps you and your client might consider.
- What is "necessary?"
- It is necessary due to current economic conditions to continue ongoing operations?
- What is "necessary?"
- English language definition of "necessary."
- Black’s law dictionary definition of "necessary."
- Common sense definition of "necessary."
- Review of case law definitions of "necessary."
- What are current economic conditions?
- How it varies by industry.
- How it varies by region.
- How it might very by client.
- What does it mean to "continue" ongoing operations?
- What are "ongoing operations?"
- What are utilities?
- Do cell phones count?
- Waste disposal services?
- What about transportation?
- What about pension and retirement plan payments?
- Caution – carefully consider whether you should pay more than a pro-rata amount and what a Retirement Plan is. .
- The law clearly contemplated including pension and health insurance without limit, although salary is capped at $100,000.
- What will forgiveness legislation permit?
- What happens for the excess? Loan repayment terms to expect.
- What can PPP borrowers to do?
- Max out payments to lower wage employees.
- Max out non pension payments that qualify.
- Is a cash flow analysis appropriate, and was it contemplated in the law?
- Was the intent of the PPP program to penalize more careful and prudent business or rather to incentivize retaining employees and maintaining salary levels?
- Calculation of anticipated use to confirm percentages and which expenses will be paid.
- What happens for the excess? Loan repayment?
- Total loan proceeds.
- Total loan proceeds.
- Estimated rental payments.
- Estimated utility payments.
- Estimated payroll payments.
- Corroboration that compensation for any particular employee is not in excess of $100,000/52 x 8 = $15,385.61.
- Does the law require this cap?
- Should you limit compensation (without pension and insurance).
- Separate bank account.
- Back up for each check.
- Copy of check.
- Copy of backup.
- Payroll company report for wages.
- Health insurance company bill.
- Retirement plan payment proof.
- Utility bill.
- Rent bill.
- Contracts and agreements as general backup.
- Copy of lease to support rental payments.
- Copy of retirement plan.
- Supportive Documentation and Showing how you used the PPP funds.
- Documenting general economic activities – is it necessary or known?
- The IRS position.
- Notice 2020-32, 2020-21 IRB 1 (30 April 2020) IRS Closes Possibility of Double Tax Benefit in PPP Loan Program.
- Limiting deductions is equivalent to taxing income.
- Normally there is a three year statute of limitation and it may take a decade for the issue of IRS treatment to be resolved.
- EXHIBIT 1: IRS Notice.
- Notice 2020-32, 2020-21 IRB 1 (30 April 2020) IRS Closes Possibility of Double Tax Benefit in PPP Loan Program
- Notice 2020-32 provides guidance regarding the deductibility for Federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer's trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program under section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). Specifically, this notice clarifies that no deduction is allowed under the Internal Revenue Code (Code) for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-93 (March 27, 2020) and the income associated with the forgiveness is excluded from gross income for purposes of the Code pursuant to section 1106(i) of the CARES Act.
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