I recently received a call from someone who was a client when I ran my six-person firm. He was trying to close on a merger, but he had received a loan under the Paycheck Protection Program (PPP) and the buyer’s attorney was asking questions about the impact the loan might have on the deal. CPAs may be finding that their clients and their own firms are running up against PPP-related questions in a wide range of areas. In many cases, the final answers are not yet clear, but practitioners should be aware of where considerations may arise.
Business sales and mergers
Because of the disruptions and changing business plans and models caused by the COVID-19 pandemic, I think that we will see many clients decide to sell or merge, and other clients seeking attractive deals in an uncertain environment. In these situations, CPAs will find their knowledge and advice in demand because of the uncertainties surrounding PPP loans. Here are some of the issues to consider in each area.
Sale of a business. In October, the Small Business Administration released Procedural Notice 5000-20057, which offered guidance on changes of ownership for an entity that has received a PPP loan. The Notice defines “changes in ownership,” and sets forth rules when a PPP loan has or has not been paid off or forgiven, including when SBA prior approval for a change in ownership is or is not required. Among the important details for CPAs and clients is the fact that, when a sale takes place and the loan has not been forgiven, the funds necessary to repay the loan will be held in escrow by the PPP lender until the loan is satisfied. That may be a surprise for many small business owners. CPAs should caution clients that, in their planning, sellers who would usually expect 100% cash when the sale is completed should factor in the possibility that they may not immediately receive as much as they anticipate.
Mergers. There are a number of issues to consider in relation to mergers when one partner has a PPP loan, including conflicts between different relief programs. Organizations are not allowed to have a PPP loan and receive an Employee Retention Credit, even after the PPP loan is forgiven. What happens when two businesses decide to form a new entity and the relief packages they had already received don’t match? At the moment, the regulations don’t address what happens in this situation. As they sort through what that may mean for planned mergers, clients may need more help with consulting and analysis in this situation to decide their best next steps.
Simplified application process for smaller loans
A PPP loan forgiveness application, Form 3508S, is available to borrowers with loans of $50,000 or less; or less than $2M in total for affiliates. CPAs should be prepared for questions from clients on whether it’s best to apply for forgiveness now or hold out for the possibility of a simplified forgiveness process down the road. Clearly, sales of businesses and mergers are among the situations where the timing of forgiveness can have an impact, but CPAs may find other situations affecting different clients, as well.
Timing of forgiveness and tax deductions
Business expenses paid with PPP loans that are forgiven cannot be deducted for federal tax purposes as a result of IRS Notice 2020-32. Those eligible business expenses can include items such as payroll costs, mortgage interest, rent and utility payments. That sounds straightforward, but clients may still have a lot of questions based on the timing of their fiscal years and the timing of the covered PPP loan period and other issues. For example, if an organization has received and used PPP funds for business expenses but the loan is not yet forgiven, are those expenses currently deductible? Similar questions may also come up for clients trying to calculate estimated tax payments.
Great tools for CPAs
As they monitor guidance and offer advice on PPP loans, practitioners can find a wealth of regularly updated information on the AICPA PPP resources site. That includes the PPPForgivenessTool.com, a free resource developed by the AICPA. CPA.com, and fintech lender Biz2Credit to assist business owners and their accountants in automating the loan forgiveness application process for their PPP funding, as well as the informative AICPA Town Hall series. PPP loans have been a hot topic for clients throughout the pandemic, and that’s not likely to change any time soon.
Carl Peterson, CPA, CGMA is the Association’s Vice President of Small Firm Interests. Have questions for Carl? Contact him directly at email@example.com or 651-252-4618. And be sure to sign up for Carl’s Small Firm Update webcasts. The next one will take place on December 3 at 2:00 to 3:00 PM ET.