The Small Business Administration (SBA) recently released draft Form 3509, which is a Paycheck Protection Program (PPP) loan necessity questionnaire for for-profit borrowers.1 The form is still awaiting final approval from the Office of Management and Budget before its official released by the SBA. If approved, Form 3509 would apply only to borrowers, who, together with affiliates, received PPP loans of $2 million or greater. The purpose of the form is to facilitate the collection of supplemental information so that SBA loan reviewers can evaluate the certification made on the PPP application that economic uncertainty made the loan request necessary.
Previously, the SBA announced that the economic uncertainty certification for all loans under $2 million, taking affiliates into consideration, will automatically be deemed to have been made in good faith.
Draft Form 3509 would require borrowers to provide certain company information falling under two categories.
- A Business Activity Assessment: which asks for information such as a comparison of 2019 and 2020 Q2 revenues and any dates where the company was forced to, or voluntarily, shut down as a result of the pandemic.
- A Liquidity Assessment: which includes questions concerning the company’s cash on hand prior to taking the loan, whether the company made capital distributions and/or paid down debt during the PPP covered period and whether any employees were highly compensated during this time.
The draft form also provides the company with sections to explain any of their answers and to include any additional facts that it deems to be necessary.
The SBA would require lenders to provide this form to borrowers who would then have ten business days to complete the form and return it to the lender with any required supporting documentation. A copy of the draft form with all the questions can be found here. Given the potential for a quick turnaround time, it may make sense for PPP borrowers of these larger loans to start compiling information and backup.
IRS Guidance on PPP Expense Deductibility Expected
The Coronavirus Aid, Relief, and Economic Security (CARES) Act makes it clear that forgiveness of all or part of a PPP loan is nontaxable to the borrower. Earlier this year, the IRS issued Notice 2020-32, which unexpectedly stated that expenses paid by forgivable PPP loan amounts were non-deductible for tax purposes. Non-deductibility of expenses reduces a significant part of the benefit that PPP loan forgiveness provides. Many commentators have objected to this and there continues to be bipartisan support in Congress to legislatively allow expenses paid with forgiven loan proceeds to be deductible for taxpayers. However, at this time, no bill has been passed and the IRS has yet to change its position.
Assuming PPP funded expenses remain non-deductible, there is a timing issue as to when non-deductibility would take effect.
For example, if a PPP borrower is not granted loan forgiveness until 2021, should the expenses still be deductible in 2020 because the company still has a loan as of December 31, 2020? If so, would the company have an income event in 2021 under a tax benefit theory for the previously deducted expenses once forgiveness is approved? The IRS has indicated that further guidance on deductibility and timing is forthcoming. At this time, it is unclear what position the IRS will take on timing, however, taxpayers should be prepared for the possibility that, even if loan forgiveness is granted in 2021, their expenses related to that forgiveness will be non-deductible on their 2020 tax return if there is a reasonable expectation of loan forgiveness at year-end.
We will continue to monitor any updates relating to the finalization of Form 3509 and the release of guidance on the deductibility and timing of PPP expenses.
1 Draft Form 3510 was also released for non-profit borrowers.