UPDATED PPP LOAN ISSUES AS OF FEBRUARY 7 2021

On February 3, 2021, the AICPA sent a Letter to the SBA outlining 4 concerns that have been affecting borrowers of both first and second draw PPP loans. A summary of these concerns are:

Challenge with Draw One & Draw Two applications being denied acceptance into E-Tran system. There were certain validation checks put into place to stop fraudulent applications. The validation checks are causing many legitimate applications to be denied. Neither lenders nor applicants understand the errors or how to address them which is causing anxiety and confusion. Applicants are being informed incorrectly that they have a criminal record or sole proprietorships that were instructed to apply under an owners social security number in round 1, but their EIN in round 2 are being denied. The AICPA requested guidance on the validation process and called for the SBA to fix the errors occurring in the application acceptance process.

SBA processing and resolution delays for applications successfully submitted into E-Tran system. The SBA reviews loan applications once the lenders submit them to the SBA. There are over 40 error codes which are resulting in 20 to 30% of successfully submitted applications to be flagged. As mentioned earlier one example relates to sole proprietors being required to use their EIN for second draw applications, instead of their social security number (which they used for their first application). One of the requirements for a second draw loan is the applicant must have had a first draw loan. The system has had issues with being able to identify that the sole proprietor in question is the same borrower. The AICPA is asking for clarity with the error codes and public communication that nearly 1/3 of applications are being further reviewed which causes delays in the acceptance process.

SBA capping of PPP Draw One and Draw Two loan amounts. The SBA’s loan processing system has put a cap of $35,000 per employee for both first and second draw loans. The AICPA is requesting guidance and communication that explain the process. Borrowers are unaware of why their maximum loan amount is being limited based on this cap.

Broad communication on available funding, overall processing and timing. Again, we know the process is taking a bit longer this time around compared to last year (once the initial process was straightened out last year) due to increased validation checks. Borrowers are concerned funding will run out while their application is delayed. The AICPA requests that the SBA inform the public of the delays and clearly communicate that funding is adequate for both first and second draw loans.

Forgiveness of First Draw Loans

THE SBA has indicated that they are prioritizing new first and second draw loan applications over loan forgiveness. This is causing forgiveness applications to take longer than expected to be processed.

Delay of Form 3508S for borrowers of $150,000 or less

Although Form 3508S, a simplified forgiveness form for borrowers of $150,000 or less, was finalized by the SBA a few weeks back many lenders are still in the process of integrating this form in their system. This is causing eligible borrowers that apply for forgiveness to either use Form 3508EZ (which requires documentation that the 3508S does not) or, in some instances, to not be able to apply at all at this time. 

Discussion on FTE Reductions on Forgiveness

We know that for borrowers with original loan amounts in excess of $50,000 that a reduction in Full time Equivalent Employees (FTE) will cause a reduction in forgiveness. Borrowers must compare their FTEs during their covered period with FTEs from either the period February 15th through June 30th, 2019 or January 1, 2020 through February 29,2020. Keep in mind if a borrower obtained a first draw loan and paid all employees over an 8-week covered period for their first draw but then reduced their staff based on economic conditions, will have a reduction on second draw loans if 2019 payroll amounts are used for the maximum loan computation. In other words, if a borrower had FTEs from February 15, 2019 – June 30, 2019 of 20. Paid all 20 employees during their first draw covered period but later reduced staff to 10 and has maintained this lower-level number of employees, they will have a reduced PPP forgiveness amount on their round 2 draw. The reason for this is the maximum loan amount is based on 2019 payroll when FTEs were 20. Although the borrower has maintained their staff at the same level of 10 since the end of their first draw covered period, payroll is down 50% from the period used to calculate the maximum loan. In this example the borrower would have their forgiveness reduced by 50%.

It is important that borrowers are aware of these rules before applying for a second-round draw. The PPP funds, even if not forgiven, are still a source of inexpensive borrowing (a 1 percent loan payable over 5 years), that is a small consolation to a borrower expecting full forgiveness.

When must borrowers apply for forgiveness

Borrowers must apply within 10 months of when their covered loan period ends. Additionally, borrowers must apply for forgiveness on their first draw loans on or before they apply for forgiveness on their second draw loans.

Recovery Rebate Checks

If you have not yet received either your first and/or second stimulus check, you can cure this through the filing of your 2020 income tax return. The only issue with this is if your income increased in 2020, you may be considered ineligible, while if your 2018 or 2019 income tax information was used, you may have received the check. It is important to remember these rebate checks are based on 2020, but if you received a rebate check and later find that based on 2020 income that you would not have been eligible, you do not have to repay the amount.

Stimulus Package

It appears imminent that a new stimulus relief bill is about to be passed. Joe Biden and the democrats have been discussing a $1.9 trillion bill, while republicans were looking at a bill of approximately $600 billion. The bill should be much closer to the higher figure based on the fact that democrats control all 3 chambers of the government.

One other item

Although nothing has been set in stone, I feel there is a good chance we will see an extension of the filing deadline beyond April 15th.  Tax practitioners are split on their feelings regard in this issue. On the one hand when a new law is passed, we must spend time reading through and understanding its impact (not to mention the many clarifications that will follow) which will cause delays in processing income tax returns. On the other hand, in 2020 it felt as if tax season never ended. Tax season had been extended to July 15th. September 15th quickly followed. September 15th is the deadline for Partnership and S corporation returns that are on extension to be filed. October 15th, which is the deadline for all individuals and C corporations on extension to file, followed quickly. Lastly, once October 15th passed, we were on to yearend planning and dealing with the new tax law passed on December 27th.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation