May 5, 2020
Hi There!

Please read these important updates to the Paycheck Protection Plan (PPP) Loan process as of May 4, 2020. This is relevant for entities such as Sole Proprietors, S-Corps, C-Corps, Partnerships, LLCs, and “Schedule C” activities.

The SKP team is here throughout the loan application period to assist in any way needed. Contact us when we can be helpful to you.

Thank you and stay safe!

Rich Pavano, CPA
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.

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.


Go to our blog for further updates about:

  • Criteria for Obtaining a Loan 
  • Criteria for Loan Forgiveness 

Remember, the SKP team is here throughout the loan application period to assist in any way needed. Contact us when we can be helpful to you.