A Few Things Small Business Owners Should Know About PPP Loans

The Paycheck Protection Program (PPP) is a massive loan program designed to incentivize small businesses to retain staff during the COVID-19 pandemic. Aside from the immediate infusion of capital to help address short-term cash flow concerns, a primary feature of the program is that the Small Business Administration (SBA) will either partially or fully forgive the PPP loans if: (i) the borrower applies for forgiveness, (ii) staff levels are maintained for the 8-week period after the loan is funded, (iii) employee compensation levels are maintained, and (iv) the loan proceeds are used for payroll, rent, mortgage interest, or utilities.

As of May 1, 2020, 46,368 Virginia, small businesses have been approved for PPP loans with a total of $3,970,159,927 granted thus far. So, as a Virginia small business owner that has applied for and received an SBA-backed PPP loan, here are the “top ten” things that you should know about your PPP loan (other than being fortunate that your loan application was processed, approved, and funded in a timely fashion…tens of thousands of fellow small business owners have not been so fortunate):

1.PPP loan forgiveness is not a binary, all-or-nothing concept. Borrowers might qualify for full, partial, or no forgiveness depending on how the borrower actually uses the loan proceeds (e.g., if you were to apply all of the loan proceeds toward rent obligations, you would likely receive partial forgiveness of no more than 25%).

2. Not receiving full forgiveness for a PPP loan is not the same as defaulting on your loan, and not seeking forgiveness is within your rights as a small business owner.

3. Forgiveness is available for the portion of the PPP loan that you used in the 8-weeks after your loan originated for:

  • Payroll costs.
  • Interest (not principal) on mortgage or personal property debt obligations incurred before February 15, 2020.
  • Business rent obligations incurred under a lease in force before February 15, 2020.
  • Payments for business utilities which service began prior to February 15, 2020.

4. Other uses that are permitted under the PPP, but not forgivable include*:

  • Costs related to funding healthcare benefits
  • Costs related to funding insurance premiums
  • Interest on debt that you occurred before February 15, 2020

5. Using your PPP loan for unauthorized purposes may create risk of criminal liability.

6. The limits on PPP loan forgiveness include:

  • At least 75% of the forgiven amount must have been used for payroll costs.
  • The amount eligible for forgiveness will decrease if you reduced staff or salaries/wages AND did not in good faith attempt (supported by written documentation) to restore staff and salaries/wages by April 26, 2020.
  • If an employee rejects an offer to rehire, that offer must be documented by the borrower.

7. To be eligible for loan forgiveness, you must keep track of how loan proceeds are used during the applicable 8-week period and be prepared to provide your lender with the following documentation:

  • Payroll documentation including:
    • Evidence verifying the number of full-time equivalent employees on payroll.
    • Employee pay rates including payroll tax filings reported to the IRS.
    • State income, payroll, and unemployment insurance filings.
  • Mortgage obligation, lease obligation, and utility payment evidence including:
    • Documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments
  • The following certifications need to be made by the borrower:
    • The documentation presented is true and correct.
    • The amount for which forgiveness is requested was used to retain employees, make interest payments on a mortgage obligation, make payments on a rent obligation, or make utility payments.
  • Any other documentation that the SBA deems necessary.

8. Loan amounts not forgiven will continue with a 2-year term and an interest rate of 1%.

9. Expenses related to forgivable loans through PPP will not be tax-deductible as business expenses (as they would under normal circumstances), but this could be changed if Congress overrides the IRS’s stance by passing a law that explicitly allows for the deductions.

10. The federal government will not count fully or partially forgiven loan amounts in the borrower’s taxable income.

This list provides a brief explanation of certain aspects of the PPP that small business owners should understand. But it is important to recognize that although the CARES Act explicitly states that forgiven PPP loans will not be considered taxable income, there is some ambiguity at the moment as to the overall tax ramifications to borrowers.

On the one hand, existing federal tax law provides that loan forgiveness counts as taxable income (states usually follow suit and incorporate the same concept into their own state codes). The CARES Act created an exception to this rule and expressly excludes the forgiveness of PPP loan debt from being considered taxable income. But an underlying, and overlooked, issue is that states are not required to conform to federal law in a corresponding fashion.

Virginia is able to incorporate this exemption into law as well, but only if it conforms to the most recent version of the Internal Revenue Code (IRC). Virginia small businesses will not owe state income tax on forgiven PPP loan proceeds if Virginia conforms before the final calendar year 2020 tax returns are due next year. However, if Virginia fails to conform by then, small businesses may be left with an unexpected tax burden stemming from their forgiven PPP loans.

In Virginia, we have what is called static or fixed date conformity, in which state law incorporates large swaths of the IRC by reference, but not as it exists currently. Instead, they include portions of the IRC as it existed as of some, other specific date, which is more often than not the end of the previous calendar year. Each year, Virginia lawmakers must vote to update their conformity date – sometimes lawmakers fall behind.

In short, those who successfully obtained PPP loans should continue to monitor SBA interpretive guidance and FAQ releases (there have been more than a dozen such releases since April). If you have a queasy feeling of uncertainty as to what this all means and how it will shake out in the end, rest assured you are not alone.

For additional information or assistance with your small business legal, transaction, and compliance needs, please e-mail or call Eric Perkins at [email protected] or (804) 205-5162.

*Check the CARES Act for other permitted, but not forgivable, uses of PPP loan proceeds.

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