This article continues the series on PPP loans but relates to the forgiveness of the SBA PPP Loan. Starting in October 2020, a recipient of a PPP Loan has ten months to report to its lender the disposition of the loan proceeds. The reporting can be done on Form 3508, 3508EZ, or 3508S. Click to see forms. Regardless of the version of the form used, supporting documentation to justify the forgiveness of the loan must be available and presented to the lender. The specific form to use depends on the amount borrowed and whether the borrower reduced employee levels, wages, or hours. As of December 31, 2020, the expenditure of PPP during the “covered period” expires.
Form 3508 is more complicated, considered the long-form, and must be used if the loan is greater than $50,000. The form may require assistance to complete.
To qualify for Form 3508EZ, the recipient must be self-employed and have no employees or have employees. They did not reduce their wages by more than 25%, did not reduce the number of employees by more than 25%, and could not operate normally because of reduced business activity due to compliance with the COVID-19 health guidance.
To qualify for Form 3508S, considered the simple form, the borrowers had to have received a loan of $50,000 or less. Businesses that received PPP loans of $2,000,000 or more and are “affiliated” as defined in the Federal Registered Volume 85, No. 73 as common management and identity of interest cannot use the Form 3508S. Click to see Federal Registered Volume 85, No. 73. Also, the SBA has sole discretion on audits of any PPP loans. Borrowers should keep their records for six years, and the more documentation, the better.
In April 2020, IRS issued Notice 2020-32 addressing the deductibility of expenses for which a PPP borrower is granted PPP loan forgiveness and states any amount of PPP loans that are forgiven are excluded from gross income. Under Section 162 of the Internal Revenue Code (IRC), a deduction for all ordinary and necessary expenses paid or incurred in carrying on a trade or business is allowed. However, IRC Section 265 and regulations do not allow a deduction to prevent double tax benefits.
In May 2020, IRS issued Revenue Rule 2020-27 that PPP borrowers cannot deduct expenses funded with PPP Loan proceeds if they reasonably expect the loan will be forgiven. In addition, Revenue Procedure 2020-51 provides a safe harbor for taxpayers who paid or incurred eligible PPP expenses during the 2020 taxable year who reasonably expected to receive forgiveness at the end of the 2020 taxable year. Conditions will apply in this instance, so review the Rev. Proc.
On August 11, 2020, the SBA released its long-promised interim final rule outlining the regulations for “Appeals of SBA Loan Review Decisions Under the PPP.” This latest interim final rule for the PPP creates specific rules and procedures for an appeal process that can be invoked by a borrower after it receives an adverse review decision from the SBA.
As is visible, the Cares Act was very beneficial to the business community during the COVID-19 Pandemic, but it was a work in progress that is complicated but is now completed. There may be a second round of PPP loans in 2021.
Sage Investigations, LLC has forensic accountants and staff that can help trace the use of the PPP loan proceeds and help with the audit of the PPP loan proceeds, allowing their clients to establish that they have met the requirements of the SBA and U.S. Treasury and help their clients deliver evidence of the proper expenditure of the PPP proceeds in accordance with the SBA guidelines.
If you or your client wants to avoid the potential perils of not handling SBA PPP funds properly, especially if the case continues beyond your involvement, consider recommending a licensed private investigator / forensic accountant and expert witness by contacting Chief Investigator Edmond Martin of Sage Investigations, LLC at 512-659-3179, or email firstname.lastname@example.org. We will pay you a referral fee, so let our 26 years as an IRS Special Agent and 19 years as a private investigator and forensic accountant benefit you and your clients. Click to read about our team and their CVs.