The Tax Implications of PPP Loans and Forgiveness By Ericka L. McKenna and Ryan W. Lockhart
By now, “PPP” has become a common term for most attorneys and business owners. In response to the potential devastating economic impact of the COVID-19 pandemic, the CARES Act was adopted on March 27, 2020 to provide nearly $350 billion of Paycheck Protection Program (“PPP”) loans for businesses. This amount was later increased by an additional $320 billion. The goal of the PPP was to keep employees on payroll. The program was touted as being simple: Use the funds for allowable expenses, and then the loan will be forgiven! But in the months since its adoption, businesses began to see that the program was anything but simple. And now that businesses have begun to apply for this “forgiveness,” the true tax effects of the PPP are being realized.
But first, what is the PPP? The PPP is a “loan” designed to provide a direct incentive for businesses to keep their employees on the payroll. PPP loans are an extension of the U.S. Small Business Administrations ‘SBA Loans’ and allow businesses adversely impacted by the COVID-19 pandemic to obtain funds needed to continue their business. We put the word “loan” in quotations because, as part of the program, the funds received are eligible to be fully forgiven if certain requirements are met. The loan will be fully forgiven if at least 60% of the funds are used for payroll costs, and the rest is used for interest on mortgages, rent, and utilities.
The loan bears an interest rate of 1%, and all payments are deferred for the first six months. Since its implementation, the rules of the PPP have evolved. For example, when the PPP first came out, the loans had a maturity of two years. That was later changed, such that all loans issued after June 5th have a maturity of five years.
Tax Implications of PPP Loans As of July 6th, the SBA reports that 4,880,943 PPP loans have been approved. As these almost five million businesses continue to utilize the funds received and begin to apply for forgiveness, the tax implications must be considered.
Continued on page 8 CONTRA COSTA COUNTY BAR ASSOCIATION CONTRA COSTA LAWYER
7
